Intro

As we saw the coronavirus situation unfolding in China and then snowballing throughout Southeast Asia, we knew from experience as investors and former operators in the region that, for some of our founders and CEOs, there would be difficult times ahead and they would need to start acting quickly and decisively.

Those who can steer with thoughtfulness and direction will demonstrate to their employees and investors their resilience and ability to withstand downturns.

At Monk's Hill Ventures, where I am a partner, we have seen recessions in the past and have ridden these downturns as former operators and entrepreneurs ourselves in the U.S., Europe and Asia. There are three important considerations, based on our experience, for founders and CEOs to think through now: organizational adaptability; capital spending and fundraising strategies; and the operational and revenue models stress test.

Organizational adaptability

Founders and CEOs need to over-communicate and adapt swiftly to protect their employees and to ensure smooth business operations during this time. It is critical to be decisive and provide flexible, clear and measured updates and policies to employees – and on a regular basis. This may include work from home policies, rolling out tools for enhanced remote collaboration, general notices around hygiene and the implementation of rigorous processes.

It is also important to consider developing a business continuity plan that is realistic and aligned to how the situation is evolving. As an example, one of our portfolio companies, C88 Financial Technologies, has immediately implemented a business continuity plan (BCP) identifying four threat levels and providing an action plan under each threat level. This plan has been rolled out across their operations in Singapore, Indonesia and the Philippines. Within days after news of more coronavirus spread, C88 implemented a group ‘Nerve Center’ made up of group executive leadership and key management to centralize and coordinate emergency policies for employees. This is alongside regular updates from the CEO, frequent email communication and town halls.

Ultimately leaders are put to test in times of crisis. CEOs should think long and hard about the responsibility they have towards their employees and how they want to show up for them. They will need to find the right balance between being comforting, communicating openly and displaying empathy.

Rethinking capital spending and fundraising strategies

The time is now to rethink the current capital spending strategy and to weigh top-line growth versus path to profitability. Top-line growth should be de-prioritized right now and sensible investors will value entrepreneurs who shift their focus towards optimizing contribution margin and making capital last, while solving for underlying business efficiency. Entrepreneurs should be focused on their unit economics and be cautious with burn rates and cash positions while heightening the sense of urgency.

There are a few additional practical learnings we can take away from previous economic downturns.

Firstly, when it comes to cost cutting, one of the biggest mistakes we have seen founders and CEOs make is not reducing HR costs sufficiently from the get-go. As difficult as it is, it is essential to show decisiveness and implement drastic measures through salary reductions, layoffs or unpaid leaves in order to ensure the sustainability of the organization. If a company ends up having to go through such measures multiple times, this will damage morale and drive away high performers. Good leaders will display high levels of empathy in the process and provide support to impacted employees.

Secondly, take a hard look at your accounts receivables and payables and figure out ways to get more working capital. If there are ongoing commercial partnerships or sales contracts, make concessions and secure deals as soon as possible. Also, lock in longer-term contracts. While in an economic upturn, shorter-term contracts enable one to renegotiate prices up, the opposite should be true in an economic downturn.

Lastly, look out for opportunities that you may come across along the way. Recessions tend to drive market consolidations so there may be opportunities for you to acquire competitors. Be creative when doing so to preserve your cash reserves and consider structures involving share swaps.

As a side note, capital raising strategies may need to change as fundraising softens over the coming months. With international travel curtailed and face-to-face meetings difficult to arrange, founders will have to rethink how they interact with investors, and how best to tell their story in a time where investors may be more selective. However, if there is a good opportunity to raise now, finalize your round as quickly as possible and raise more than initially intended.

The operational and revenue models stress test

There is much uncertainty on how business and consumer behavior will change over the next few months. It is important to keep in mind that how consumers behave in times of panic is not a long-term strategy. This means founders and CEOs need to challenge their underlying assumptions when it comes to their revenue and operating models.

Companies may see a spike in demand or a decrease in demand depending on their industry during this time. For example, another portfolio company Padlet, a productivity tool widely adopted in the education industry, saw increased demand recently likely due to more students using remote learning.

For companies that are seeing a spike, now is not the time to increase fixed costs to meet the demand. Instead, founders should come up with creative flexible ways to scale up and down their capacity to meet demand while remaining nimble to further adapt, when the tides may change.

As VC investors, we see the ability of a founder and CEO to navigate coronavirus as an ultimate stress test. We don’t know how long coronavirus will last, though likely longer than one may expect. They say we learn our best lessons in times of crisis – the above three considerations are lessons from our past, which I hope will serve well not just in bad times but good times as well.

This op-ed was first published in Nikkei Asian Review on April 1, 2020

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