Posted by : The Caspian Debt Team Thriving in the times of uncertainty
We are going through uncertain times.
The impact of Coronavirus is still unfolding and a multitude of factors beyond Coronavirus is leading to general economic stress in India. It would be prudent for start-ups to keep an eye out for potential negative scenarios and hence mitigants. Some start-ups may be well-funded but no harm acknowledging the potential risks and utilizing this as an opportunity to grow stronger.
What is happening?
Four major events are likely to shape the future for start-ups are:
- Coronavirus: Due to coronavirus, we are expecting a slowdown and uncertainties in business. The concerns don’t just arise from the supply chain and demand disruptions but also obstacles in employees being able to come to offices and factories or attend sales meetings. The implications on the economy are still to be determined but experts are expecting anywhere between a 0.5-1% dip in GDP growth to a possible recession.
- Uncertainty of the Indian financial sector: About five years ago, state-owned banks were put under Prompt Corrective Action (PCA), on account of asset quality and capital issues. This led to the slowing down lending. While many of them have come out of PCA, over the past 18-20 months, the NBFC sector has had to slow-down lending due to their liquidity issues which began with the ILFS crisis. Private banks were the only entities in the financial sector that were until recently, lending and accounting for as much as 60% of incremental loans in the economy. However, recent events like Yes Bank has created general uncertainty for deposit holders/debt providers to private banks. Therefore, it is expected that private banks will turn more risk-averse and conserve liquidity as well, going forward. This can further aggravate the credit crunch.
- Venture Investor shift towards unit economics and profitability: India has observed a funding boom for start-ups, but as usual, the problem has been that too much capital has been chasing too few start-ups. In addition, due to the failure of the WeWork IPO and a few other well-funded start-up failures/near-failures last year, venture capital investor focuses on start-up unit economics and profitability has suddenly gone up.
- Uncertainty in listed markets: Due to coronavirus and oil price wars, listed markets across the world have seen brisk selling. Investor confidence is significantly low and conservatism is on the rise. This will also have an indirect/direct impact on funding to start-ups.
What could this lead to?
Given all the above factors, the following fallouts are already visible:
- Supply chain disruptions: Given the dependence of several businesses on China and other foreign countries where the supplies come from, we are already finding cases of business disruption. The lockdowns across locations both internationally and domestically is directly impacting supply chains. There is a need to find alternate suppliers, alternate delivery mechanisms and alternate sales mediums.
- Demand weakening: The general overall economic stress that India was going through even before coronavirus struck, had led to fears of massive job losses, failure of businesses and credit crunch. All of this impacts tax collections and hence govt’s ability to spend as well the general ability of the population to spend.
- A slowdown in decision making: Slowdown in business decision-making processes due to the stoppage of business travel and work from home norms is a reality. The companies (especially the B2B companies) that depend on in-person meetings to conduct sales, business development, or partnership discussions are being affected. Simple issues of work from home will lead to a lag in processes because a lot of financial transactions are still paper-driven.
Investor conservatism: Market and investors are going to reward businesses that focus on fundamentals and are well run. This is about balancing growth and profitability, having strong connections with customers and demonstrating exemplary governance practices.
How do we deal with this?
At Caspian, we have been investing in start-ups for 15 years and have funded close to 150 companies. Some of the things we have learned over the years from our portfolio companies which have braced several different crises are outlined below:
- Safety First: This is not the time for heroism or taking risks. Its time to ensure that employees, customers, and communities are safe and not exposed to undue risks. Follow WHO guidelines, stop rumor-mongering, communicate more and act swiftly. Leverage technology to the extent possible.
- Conserve Cash: Evaluate cash runway, revisit assumptions about fundraising. Ask for additional commitments from existing investors. This is not the time to argue overvaluations but the speed of garnering funds. Assume a fair amount of delay in funds actually landing into your accounts and plan for your cash burns in a manner that there is sufficient cushion to take care of absolute essential payments including salaries, taxes, loan repayments, and critical suppliers. This is not the time to lose hard-earned creditworthiness and shirk from major responsibilities.
- Prepare for the worst-case scenario for the business indicators: Evaluate your business plan projections with sensitivity. The downturn is expected to last over several quarters, expect lower revenues over time and see the amount of stress your business can take. Prepare contingency plans for continuing production, supply, and distribution.
- Cut down discretionary spend: Differentiate planned activities between “must-have” and “good to have”. This is not the time to move to a swanky office. This is time to evaluate with laser focus the critical spending for the business. Relook at training, travel, hiring, marketing, consulting and capital expenditures planned for the year.
- Plan for new normal: This crisis is likely to impact employees, customers, and other stakeholders in ways that are hard to imagine. As the things stabilise, it’s important to keep the senior team engaged on key priorities and continue to adapt to the emerging situation with alacrity. This is an opportunity to deepen customers to connect and focus on customer retention. This could be time to re-evaluate product lines, geographical expansion/retraction, marketing strategy and financing strategy.
- Innovate: Necessity is a mother of invention. These situations might help you discover new ways of doing established things and find ways to improve productivity and efficiency. Keep your eyes and ears open – there are always things to learn from a good crisis.
- Communicate with investors, lenders, and employees: In times of crisis and uncertainty, err on the side of over-communicating than under. Stakeholders appreciate honest, open communication even about bad news from entrepreneurs. This is a sure-shot way to earn their trust and support.
- Compliances: MCA and GoI have given several concessions given the ongoing crisis. Please make note of new deadlines. The boring yet necessary part – compliance – you don’t want to be on the wrong side of regulation or law because it could kill the company. Also, good compliance demonstrates to investors and lenders about your high-quality operations.
To conclude, being an entrepreneur or a CXO, it is easy to fall into the trap of creating false optimism for yourself. You may think that telling investors, employees, and lenders that “we are not worried because there is no impact on us at all!” is a sign of strength but the truth is, that can’t be true in the times that we are living in. Everybody will feel more assured if they see an acknowledgment of the potential issues and the willingness to take decisive action as time demands. To quote Martin Luther King “Our very survival depends on our ability to stay awake, to adjust to new ideas, to remain vigilant and to face the challenge of change.” We are sure we will all take this challenge in our stride and emerge stronger. So, here is wishing everybody the best and hoping that everybody will use this potpourri of crises, as an opportunity to grow stronger.