Start-ups and the Corona Crisis – Adjust and Move on
Sequoia Capital (https://www.sequoiacap.com) shared on 5 March 2020 the post "Coronavirus: The Black Swan of 2020". The venture capital investor recommends that the start-ups in which it has indirectly invested will among other things save costs, reduce their own cash burn rate and adjust their targets at least for the current financial year.
A little more than ten days after the publication of the post on the venture capitalist's website, German politicians - with a view to Italy - are taking increasingly drastic steps to slow down the spread of the coronavirus. For start-ups as young companies with strong growth and low capital stock, the crisis comes - if one excludes the few winners - in a rather bad phase of company development. The question therefore arises as to what start-up companies can do to survive this phase or, ideally, to emerge from it stronger.
Please find here (Link) the reference to the article of my colleague Dr Daniel Walden regarding the specifications of the management of start-ups in crisis situations of the present kind.
When analysing the scope for action and recommendations, a distinction must first be made between early stage start-ups on the one hand and later stage start-ups on the other. Due to their different degrees of development, both groups of companies have different options for reacting to the crisis.
I. Later Stage Start-ups
If one starts with the later stage start-ups, the best entry for considerations is the planning calculation of the respective company - in whatever form it is available; be it in the form of a business plan or, for example, an integrated planning calculation.
a) Step 1: Extend Runway
It is to be expected that not only will further funding become more difficult in the coming months and the processes more difficult and time-consuming but also - as is currently the case with the vast majority of companies - sales will decline.
The existing planning should therefore be revised to the extent that the runway needs to be extended: The same money has to last longer. Accordingly, the sales forecasts and, correlating to this, the marketing must be adjusted.
However, in order not to ruin oneself now and to use the time in which less sales are generated for the further development of the IP or the business, the announced state aid will also play an important role for later stage start-ups as bridge financing. We will keep you up to date here. How the state rescue plan will be structured and whether it is really suitable for later stage start-ups as bridge financing, especially whether it makes sense to raise these external funds compared to a small interim financing round with the existing investors, will only be known in the next days and weeks - we will keep you informed here.
In the event that the government funds are not suitable or not available and the existing investors do not agree to a bridge financing round either, one should think about arranging a small round of convertible loans and, as usual, offering the lenders a discount on the upcoming financing round which will only take place once we are out of the worst of it.
b) Step 2: Other Measures
In order to address all the issues involved in the adjustment of planning, other measures to reduce costs in times of declining sales must of course also be considered, in particular by making use of all the possibilities offered by labour law. Our labour law experts will provide further information on this shortly.
Finally, the subject of filing for insolvency must of course also be kept in mind - here too, there are currently considerations of suspending or postponing the obligation to file for insolvency; we will keep you informed about these considerations as well.
II. Early Stage Start-ups
Whether it will become more difficult for early stage start-ups to adapt to the current situation is not yet clear.
What is certain is that only a few weeks ago, VC funds were able to successfully collect money. So capital is available and wants to be invested. However, the funds have considerably more time to distribute this capital than start-ups looking for initial financing. Due to the current uncertainty, it can be assumed that we will see fewer financing rounds in the coming weeks. However, promising start-ups will also receive financing in the coming months. It is questionable though whether evaluations will be the same as in recent months.
It therefore seems most reasonable to wait and see for early state start-ups as well. However, since there is regularly no cash flow here yet, this wait-and-see approach must be structured differently than for a later-stage start-up. As far as it is not possible to finance the start-up from own funds and in the broadest sense to bootstrap it, it will be necessary to raise capital. We will keep you informed whether the announced government financial support will also be available for early stage start-ups. At the moment we see no reason to believe that this will not be the case. Apart from that, those start-ups that do not receive any financing or only for an evaluation that they do not want to accept, should also consider convertible loans. The major criticism of convertible loans is regularly that the question of evaluation is not solved with the convertible loan. Many therefore speak of a postponed date. It is precisely this disadvantage that can offer an advantage in the current situation.