During the 2008 financial crisis, we were in a similar situation with our startup, kooaba. Actually, when it hit, we were in a due diligence phase with a potential acquirer. They suddenly faced financial challenges themselves and drew back. We ended up running out of cash, and it was impossible to raise any money as most investors stopped all activities. Moreover, we still had to pay the horrendous fees of our lawyers for the due diligence. We faced nine months of bare survival. Thanks to a great team and a lot of luck, we managed to raise the necessary cash at the very last minute to carry on. Kooaba became a success and was acquired early 2014 by Qualcomm and is today part of the AR platform Vuforia.
Cash is the fuel of a company. When a startup runs out of cash, it will have to stop operating and is doomed to close its doors. A crisis is, by definition, “a time of intense difficulty or danger.” Nobody knows how long it will last or how bad it will get. Therefore, startups need to react as soon and as resolutely as possible in order to survive. Now we are in such a situation. The coronavirus kills people, and it will kill companies. Therefore, foremost make sure to stay healthy. Then you need to do everything possible to reduce cash burn and maximize revenue to keep your company afloat until the market gets better.
Here are some options for startups in times of crisis. Some of them we applied ourselves, others I observed in other startups.
1. Reduce cash burn
- Stop paying bills immediately. This is the easiest and most short-term measure you can take. Of course, you will have to pay the bills someday — when the situation looks better and the markets recover. However, always pay the social insurance fees for your employees.
- Reduce employees' hours temporarily. If there is a lack of work, you can temporarily reduce or cancel your employees’ working hours in certain countries. Your company only pays a part of the salary and the state compensates for the whole or parts of the rest (in Switzerland it's 80 percent). The good thing is that you keep your staff. The bad thing is that they work less.
- Reduce salaries. This is more a credit from your employees rather than really reducing salaries. Ask your team if they are OK if you pay them less salary for the coming months if you reimburse once the crisis is over. You will need written consent, and it’s a great commitment from each individual employee. Still, you will have to pay social insurance for the full salary. Founders could go as far as reducing their personal spending however possible and put every dollar they have in the company.
- For ETH spin-off companies, you might be able to temporarily change the contracts of some employees to ETH contracts. This makes sense for research and postdoctoral stuff. Your employees will have to work for ETH Zurich, but you won’t lose them.
- Reduce headcount. This is the last measure, but you might have to take it. Better earlier than when it’s too late. It’s hard to let go of good employees, but they will understand, and if you’re lucky, you can hire them back after the crisis.
- Get a job. If you are in an early stage of the company, it’s possible to get a job. I saw this many times when founders took a day job for the sake of the company’s survival. They worked on their startups during their spare time until times got better. If you’re in an early stage, consider looking for a job.
Related: 4 Ways to Find Opportunity in a Crisis
Related: 3 Major Opportunities That Will Come From This Pandemic
2. Maximize cash influx
- Always be closing. If you already have a sellable product and your market is not negatively influenced by the pandemic, focus on sales. I saw companies that put the whole team, including all developers, on sales. Everyone had to pick up the phone and call prospects.
- Credit from customers. Ask your customers to pay in advance. This one you can use even if you don’t have a product yet. Take pre-orders. It’s a risky thing, but it’s better than closing the doors.
- Start consulting or other activities to drive short-term revenue. If your product is not yet in a sellable state, go for consulting assignments. This might give you the necessary time to survive the crisis.
- Sell company assets (computers, machines, equipment) and rent them in the meantime. It’s not much, but it might just give you an extra month.
- Startup competitions. Take part in every startup competition where you can win cash. It might take some time, but sometimes you’re lucky and win it just in time.
- Bridge round with existing investors. If you already have investors, ask them for a bridge round. Fastest is a credit.
- Friends and family round. Explain the situation to your friends and family and ask for their support. Again, fastest is a credit.
- Foundation can be a faster source of cash than equity investments.
- Bank credits. They might be harder to get now, but they are often easier and faster than equity investments.
The bottom line is this... try everything you can to survive as long as you can. Crises separate the sheep from the goats. Make sure you increase the chances of success with everything you do.