On the daily news, we often hear about how MNCs and big companies executives taking pay cuts, cutting costs, letting employees go and barely surviving. Now what about the startups and SMEs scene which has been flourishing in this region for the past 5 years? What does the situation really look like? Here’s a very quick and real lowdown.

How Will Startups Do In A Recession?

Amid the COVID-19 global meltdown, 21 founders from various SEA based startups from the SEA Founders got together for a “scramble” call on a Sunday morning over Zoom with Anna Gong (Perx Technologies) and Suresh V Shankar (Crayon Data) leading the discussion on issues and solutions to help each other tide through this difficult time.

The following notes are from a closed door 3 hour discussion to crowd-source challenges, ideas and solutions all of us are currently facing.


Staying Alive Is The Main Focus For Many Startups & Businesses

Overall, the landscape is evolving very quickly with new measures put up by various government bodies across the world every single day.

And it looks like we are only at the start of this downturn before we head into a full-blown recession which is fast accelerating.

Top 3 Concerns:

  1. Delayed revenues (because clients drag out payment cycles)
  2. Urgent need to bring down burn rates, and free up cashflow
  3. Inability to travel and do business deals across borders

Top 3 Opportunities:

  1. Chance to optimise costs and get rid of fat
  2. Chance to re-focus on priorities in the business
  3. Competitors may shut down

Here are the 5 Key Areas of Concerns & Solutions

The following key points outline the main plans that the founders are aiming to execute on, as well as solutions that were collectively contributed during the discussion.

Area 1: Revenue

Founders concerns on revenue are mainly on longer sales cycles and unpredictability of revenue streams.

Concerns:

  • Longer sales cycles
  • Prospects negotiate more (dragging out sales cycle) and expect discounts
  • Pipeline is weakened: deals are delayed or cancelled
  • Need alternative revenue streams
  • Revenue forecasts impacted; inability to project
  • Unable to travel for lead generation and to close deals

Solutions: 

  • Size down projects to reduce sales cycle
  • Shorten delivery to receive ARR sooner
  • Double down on customer success to cross-sell/upsell to existing accounts
  • Get into more strategic partnerships to open up new revenue channels
  • Offer discounts for early payment
  • Looking for additional/new revenue streams by charging other/different stakeholders
  • Target verticals that are more resilient
  • Focus on business units with higher contribution margin
  • Alter product offering to meet changing market needs
  • Globalize/diversify product range and service
  • Reposition product to become an essential instead of a nice-to-have

Area 2: Cashflow

Delayed payments from customers severely reduce cash flow and runway for businesses.

Concerns: 

  • Delayed payments: Delay in payment from customers
  • Reduces cash flow
  • High OPEX (Operating Expenditure)
  • Results in high burn rate for current crisis situation
  • How to adjust/reduce expenses?
  • Runway has been significantly reduced, so how can we extend it?

Solutions:

  • Bridge round funding from VCs (Venture Capital)
  • Government-supported loans from banks
  • Chasing more aggressively on existing receivables
  • Re-negotiating payments of existing loans from banks
  • Headcount freeze (don’t hire or expand team)
  • Cutting costs across: Marketing and ad spending, Salaries

Area 3: Costs

Cost-cutting measures to focus largely on employee salaries and benefits, and implementing a headcount freeze.

Concerns:

  • How to reduce costs without jeopardising the ability to produce and deliver value
  • High employee and tech costs
  • How to conserve cash especially when the burn is mostly for wages
  • How to validate a pay cut when there is still work needed to be done

Solutions:

  • Negotiate for lower rental
  • Negotiate with vendors eg AWS/GCP to lower price
    • AWS separates staging vs production environments
    • AWS price loaded onto production
    • Optimising on databases
    • Reviewing codes
    • Optimise API calls
  • Cut digital marketing budgets (e.g. slash Google ad spend by up to 50%)
  • Eliminate non-essential cost items (e.g. SaaS subscriptions)
  • Delay in account payables
  • Salary and Employee Benefits-related:
    • Headcount freeze
    • Delay portion of salary
    • Postpone salary increments
    • Pay cut starting with management
    • Temporarily reduce employee benefits

Area 4: Employees

Low employee morale a cause for concern with impending pay cuts and freezes. Founders to focus on over-communicating and being transparent to build trust and relationship.

Concerns:

  • How to ensure productivity does not slip because of WFH measures
  • Employees looking to leave because of uncertainty about the future and security of their roles
  • Low morale when lay-offs and salary cuts are implemented
  • Team is lean to begin with; with layoffs looming, remaining team will be over-stretched
  • How to properly communicate cost-cutting measures

Solutions:

  • WFH mandated for employees using public transport
  • Implement daily huddles/stand-ups to ensure WFH employees are on-track
  • Be transparent in communications
  • Over-communicate, be available and present to take questions and continuously align 
  • Issue/top-up ESOP to cushion pay cuts 
  • Salary deferment for productive staff
  • Implement 4-day work week for under performers or non-performing staff

Area 5: Funding & Investors

Investor confidence negatively impacted; Founders looking at bridge round in Q3/Q4

Concerns:

  • Are investors looking out for different things in times of crisis?
  • Which VCs are still in a strong position to invest?
  • Whether to take bridge funding from existing investors if it is not required at the moment
  • Previous projections are now invalid, uncertainty in markets make future projections difficult
  • Investors asking for long term plans and projections which are difficult to project now:
  • Scenario planning for 30, 60 and 90 days
  • Scenario planning for 6, 12, and 24 months
  • Investor confidence may drop significantly as they are more cautious and risk-averse
  • Delays in receiving of funds

Solutions:

  • Having 1-on-1 conversations with key investors to reassure and realign
  • Show preparedness and measures taken
  • Ask existing investors for bridge round in Q3/Q4
  • Government: Working capital loans guaranteed by the government
  • New VCs in town (B and C rounds):
    • Lightspeed ventures
    • 8 Road Capital
  • Dry powder:
    • BRI Ventures
    • Tanglin Ventures Partners

Conclusion: We Are All Entering New Territory

Essentially there are other questions which loom in the near future, which I’m sure no one has answers to as yet.

  • How long will this crisis last?
  • How long will it take to bottom out?
  • How to deal with a prolonged situation that may last more than 12 months?

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