March 25, 2020

COVID-19: Five Strategies to Help Funded Startup Companies Survive the Coronavirus Crisis

By Rich Mazzola, CPA, Manager, Risk Advisory Services

Risk Advisory Services

Getting a business off the ground is no easy feat, so owners and operators of post-revenue startup companies are used to facing challenges at every turn. Yet, the COVID-19 (coronavirus) pandemic presents an extreme – indeed, existential – challenge the likes of which most current startup executives have never seen.

Even as Congress works to pass and implement a massive $2 trillion stimulus package hammered out on March 25, prospects for securing investor funding for your startup remain bleak in the next six to 12 months. Yes, most banks, as well as venture capital firms and angel investors, currently have funds to invest; but given COVID-19-related shutdown conditions in many industries, work-from-home mandates and the precipitous market drop, cash hoarding is the new norm, and until market conditions tangibly mellow, funding challenges will be formidable.

What to do? There are five steps you can and should take now to help your company navigate the crisis:

1. Control your cash burn rate.

If you’ve established a plan to raise money in Q3 or Q4 of 2020, and now those funds likely are out of reach, you may need to make your current nest egg last for an additional 12 months—possibly even longer. Starting now, take a hard look at your budget and determine what expenses you can let go of. Additionally, take stock of revenue and/or cash that you were you expecting to come in, and clarify in your own mind how that will impact your bottom line and cash burn under present-day circumstances. If the COVID-19 crisis touches your business directly (a likely scenario), then sales will be impacted, so you’ll need to discount those back – probably drastically at first – then start tapering that off as you move throughout the remainder of 2020.

2. Dig deeper to remove additional expenditures.

Review all non-essential expenditures in your business – e.g., trade shows that no longer exist; employee bonuses; off-site team meetings; entertainment, meals and/or travel – and think seriously about pulling those out of your budget. By removing those costs from your projections, you can better understand the associated impact to your bottom line and your total cash position. As a result, you’ll start to see if you’re positioned to weather the storm.

3. Gather customer intelligence, then revise sales forecasts as needed based on your conclusions.

Look outside your business to get a real sense of where your business stands. Are you part of your customers’ cost of goods sold, or are you part of their operating expense line? If you represent a primary cost for them to sell their product, then knowing how they are being impacted by the coronavirus crisis helps you understand its impact on your business. Reach out and talk to them. What’s affecting them in this current environment? How is their ability to spend dollars being impacted? What are their customers saying to them? Is there a creative solution in payment terms or pricing to keep them buying at this time? With intelligence in hand, you can reexamine your revenue/sales forecast to determine the realistic impact of the coronavirus crisis on your cash position—and ultimately, devise a contingency plan to hoard your cash and spend less.

4. Explore opportunities to defer expenditures.

Reach out to landlords, banks, software-as-a-service (SaaS) providers and other entities on your accounts payable ledger and request opportunities to defer payment on associated expenditures. Chances are good that these entities don’t want you to completely walk away from their business, service or physical space, so they may be open to alternative arrangements that help you stretch your dollar. In the current COVID-19 environment, every dollar counts, so treat yours accordingly.

5. Leverage lending services if needed to make ends meet until your next funding round.

Unfortunately, some startup companies were overleveraged heading into the current crisis, so they could be compelled to lay off employees or seek alternative financing options to keep the ship afloat. There are dozens of lending services available that focus on startups; do some research, and ideally, consult with experts in the field, to determine whether your startup could benefit from leveraging one, and what the costs would be in the short- and long-term.

Finally, if your startup/emerging company is in the pre-revenue stage, remember this: While investor funding isn’t likely to be available in the near term, you should take an opportunistic approach to control your burn so that your growth prospects are delayed, not decimated. You still have an opportunity to make your startup a reality; you just need to revise your timeline accordingly.

Thankfully, history strongly suggests that this current crisis is more akin to the post-9/11 market environment than the post-2008 market environment. Why? Primarily because banks aren’t at the epicenter of the crisis; they’re not the cause of problems we face today, and generally speaking, their cash position is strong. They’re not over their skis, and they’re not over-leveraged. When recovery begins – and it eventually will – they have the capital necessary to invest back into the markets and finance debt. So, instead of a five-year healing period like we saw after the 2008 crisis, we likely face a more manageable 12-18-month recovery period.

Summary

In uncertain times like these, emerging companies derive great benefit from leveraging outside expertise. Marcum’s Emerging Companies team is always available to review your projections and forecasts, assist with financial and operational issues, and help you determine the true impact of this situation on your bottom line and cash flow position. If you need assistance in terms of funding or financing, our team members have deep experience helping startups and other companies navigate SBA disaster loan applications.

Do you have questions about connecting and engaging with investors, or other emerging company issues? Please contact Rich Mazzola, CPA, Manager, Risk Advisory Services, at 440.459.5700 or email Rich.