Preparing for the worst but looking forward to the future
By Dr V. Sivapalan April 12, 2020
- Be prepared to serve customer needs better and grab opportunities faster than competitors
- Building Pegasus-type companies through ScaleUp Malaysia Accelerator to win the game
[Part 1 of this article appeared on Fri: Recession Today, Opportunity Tomorrow: How To Build Sustainability Today And Prepare For The Coming Economic Recovery]
Most entrepreneurs don’t look too far ahead. They are often caught up fire fighting on a daily basis and worry about operational matters and survivability more than strategic matters. However, when a crisis hits, thinking about the future of their industry and forward planning take on an equally important position within their daily roles.
The Malaysian government has already introduced two stimulus packages to assist individuals and companies to get over the current pandemic. While there is a lot of support for individuals and conventional SMEs, these packages don’t do enough for the tech sector especially Startups. Most Startups are small, young (less than 3 years old), don’t have sufficient cash flows to take on loans and most don’t have a track record to even apply for a loan. The Prime Minister has indicated that there may be a third stimulus package for Startups so I think we need to wait for his announcement.
However, companies shouldn’t just wait for government assistance. Now that we know the recession is here, there are several critical things entrepreneurs need to do. These are divided into two areas, building sustainability and preparing for the recovery.
To take advantage of the recovery and future potential, you have to first stabilise the ship so that you can survive the next 12 months.
Many companies don’t have sufficient cash flow for even a couple of months, but there’s ways to preserve and stretch your cash for a longer period.
Firstly, look at your debtors ageing and identify who owes you money and assess how much you can collect and how soon. A lot of companies have uncollected billings that may give them a lifeline. Work on collecting as much of this as you can. Give debtors discounts for early payment if you have to. But get this cash into your bank account.
Are there customers who may buy your products or services at a discount? If you have to give discounts for cash sales then this can increase your cash buffer too.
Some services can be sold now for future use. Airline tickets and hotel rooms for example sell tickets and rooms that will only be used sometime in the future but collect the payment in advance. Can you also do this? If yes, then do it.
Stretch Your Cash
As you build your cash resources, you also need to stretch this for as long as possible. Ideally build sufficient cash for a 6 -9 month period. As some normalcy returns you will start selling again and revenue will return.
In the tech industry staff costs are the highest, often 70 to 80% of total costs as its primarily a knowledge based industry. Find ways of reducing staff costs. You don’t necessarily have to retrench staff, start with across the board pay cuts instead. It must start with the founders and management right down to the staff. However, cuts for staff earning smaller salaries should be much less than for those earning more. But make sure everyone has a pay cut.
Explain to everyone why pay cuts are needed. You’re trying to save the company and saving jobs. If cuts are not made then either the company closes down or there will be retrenchments neither of which are desirable. You staff will understand and good staff will stay together to save each other’s jobs.
When making pay cuts, do it in one big round, don’t do small cuts and then make more cuts later. That will create uncertainty and will cause staff problems with planning their own cost cutting measures. However, try and ensure that what they take back is sufficient for living costs.
I’ve been asked whether these should be pay cuts or pay deferments i.e. you cut their pay now but agree to pay the difference later. This is not a good idea as this can cause serious cash flow implications in the future; essentially you’re just pushing the problem into the future. Cut salaries but as soon as the business stabilises increase their salaries again and if the business does well pay them a bonus as appreciation for helping the business survive.
In some cases you may need to retrench staff, perhaps because just cutting salaries alone is not sufficient or because the business has fundamentally changed and some staff may not be needed. In that case make one major cut of staff you no longer need and make sure you don’t cut anymore in future. The worse thing you can do is cut slowly. This creates a lot of uncertainty and will affect staff emotionally as they won’t know who else will lose their jobs in the future.
This may be the hardest thing you do as a founder, but it may be necessary to save the company.
Ultimately, the amount of money you save from pay cuts should allow you to stretch your burn rate for a longer period.
Then talk to creditors, your landlord and other business partners and ask them for payment extensions. If necessary pay in instalments over a longer period and keep to your promised schedule. They will understand.
If possible re-negotiate tenancies and other costs, ask for short-term discounts or reductions. No one wants you to fold up so most people will try and accommodate.
Secure Additional Cash
If it’s possible secure some additional cash either via investments or a loan. But remember that a loan has to be paid back and you will need revenue and cash flow to do this. So raise only the extra sum you’ll need for the next 6 to 9 months and ensure you can pay this back. Also, if the government has any grants or is offering any support via their stimulus packages go grab it immediately.
Resource and Performance Reviews
As part of the plan, review your resource requirements especially staff. How many people do you really need, who do you need, what must they do, can they do more? Some companies actually have more staff than they need or if the future of your business has changed maybe some staff are no longer needed. Do the necessary restructuring to your staff requirements so that going forward you have optimum staff levels.
You also need to improve productivity of your staff. Are you tracking their productivity? What metrics are you using? Are you benchmarking against industry norms? In a recession everyone has to give 150%, so everyone has to do a lot more. Everyone’s performance has to improve significantly.
You also need to do a complete product review to determine which products or services are providing you with better return on investment than others. For products that bring poor ROI or cause you to lose money, cut those products and focus on those with better margins. This may also require less staff and lower your costs. Better margins mean more cash flow.
Future products or research and development must also focus on products that will bring better ROI and not just vanity products with poor returns.
Better Business Models
Review your business model and pricing strategy to make sure it’s optimised to bring the best returns at the lowest cost. Look for innovative models that may bring more sales or better margins. Don’t assume the old ways of doing things are the best. Some ideas can be found in my book, “Blue Sky Innovation” which is available on Amazon Kindle. If you can create a model that brings in recurring monthly or annual incomes that is a better way to build a sustainable business than one time sales.
Check your unit economics to ensure that the lifetime value of your customer (i.e. how much you make from the customer over the period the customer buys from you) is at least three times your customer acquisition cost. Founders often do not realise it but their customer acquisition costs are much higher than they think and their customer lifetime value (LTV) is lower than expected and this leads to a poor business model. Review this and ensure that the returns justify the costs.
Sometimes this depends on your pricing strategy. If you don’t price it right you may be earning much less than you can and this can lead to poor margins. So review your pricing and do some experiments to determine if you can price the product higher. Better positioning or packaging can also lead to better pricing and a higher margin.
Hopefully these suggestions will help you to sustain your company for the next 12 months and help you manage the recession better. Once you are able to do this, you need to then prepare for the future, as there will be a lot of opportunities when the world economy recovers.
Preparing for the Future
Every storm has a silver lining and if you can weather the storm you will be in prime position to take advantage of the strong growth of the global economy that happens after every recession. History has shown us that recessions are generally short but the recovery and subsequent growth period is long and profitable.
With less competition in the market, the addition of good talent, stronger financials and a better business model you will be primed to enjoy the benefit of a long period of growth.
However, you’ll need to ensure that you tap all the opportunities available post recession.
Explore the Potential
Use this time to explore and study your market and industry to discover what new opportunities are available for the next 5 - 10 years. How will changes in consumer behaviour, market and technology trends and government support change your business environment? Does it open up new markets, new sectors? Do you have to adapt your product to new problems or needs? The more you explore, the more you talk to customers and ecosystem leaders the more understanding you’ll build about the future and this will help you to change, adapt and position your company and products for the future.
Be prepared to serve your customer needs better and grab the opportunities faster than competitors. Remember some competitors won’t make it; many others will be badly bruised and won’t be able to compete as effectively as before, so this means you have the upper hand.
However, as you do this remember that you must build a financially strong and long-term sustainable company because funding will be scarce, so the only way to fund the business is via sales and margins. Build a company that is profitable and you’ll not just survive but thrive.
No matter how bleak it looks now, if you do all of the above, you’ll be a very successful company from 2021 and beyond.
Building a Pegasus Business with ScaleUp Malaysia
In mid-2019 I was already predicting a recession. Not because I’m super smart or that I have a crystal ball, but if you go back 100 years, you will realise that every 8 years or so after a recovery a recession happens. The global economy started recovering from the GFC from 2009 and it’s been one of the longest periods of prosperity over the last 100 years. With this prosperity comes excesses and this will always lead to a recession. It’s a predictable cycle. We only don’t know what the trigger will be but it’s always been a black swan event. Unfortunately for this recession it was the coronavirus and the disease it causes, Covid-19.
Knowing a recession was looming, when we launched ScaleUp Malaysia Accelerator, our model was premised on building a “Pegasus” which we define as a high growth but profitable company. Hence we don’t believe in the “Go big or go home” mantra or the build market share at all expense model either. This was ok in the go-go years of the 2010s but as you approach a recession this is a dangerous strategy. We can see the possible failure of multiple companies that have this model, from WeWork to OYO to the many other VC funded companies that sacrifice cash flow and profitability for market share. In fact many of these companies don’t even know if they’ll ever turn a profit. That model is now dead, for the next few years anyway.
Hence in ScaleUp Malaysia we selected companies that have high growth potential, but also have a business model that allows us to build a path to profitability. Even if growth is not as fast as some of the VC funded companies, its ok, as we are willing to sacrifice some growth in return for profitability and a positive cash flow. Today cash is king, so a positive cash flow is highly desirable and this is what all ScaleUp Malaysia companies are working towards.
We are not worried about the recession because we already knew it was coming. All our investee companies have solid business models and great prospects going forward and we will prepare them to be resilient and to have a business model that helps them to build a sustainable and long-term profitable business.
We will use the strategies and ideas mentioned above to do this.
I am sharing these ideas because I am passionate about entrepreneurship and have spent the last 2 decades helping entrepreneurs to build great businesses. So I hope you’ll take advantage of what I have shared and work on building a solid business that you can be proud of. And if you do, apply for future cohorts of ScaleUp Malaysia because we would love to work with you.
Until then, stay strong, stay positive and stay safe.
(Dr. Siva has a Ph.D in Venture Capital from the University of Edinburgh, Scotland. He is the Co-Founder and Senior Partner of Scaleup Malaysia Accelerator (www.scaleup.my) and Co-Founder of Proficeo Consultants (www.proficeo.com). Visit his LinkedIn at https://www.linkedin.com/in/drsivapalan/ )
He is also the author of “Blue Sky Innovation” published in Feb 2013.