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Background - Investor sentiment:
According to a 100X.VC India sentiment outlook survey done in 2Q2020, 45% of Founders in India said that the VC response time has slowed down. Angel Investors and VCs surveyed 64% are worried and changing their strategy, mostly tied to recovery of economy. Also 75% of them see lower valuations sought by founders in 2020. 91% of investors surveyed said that they will delay investing in early stage startups – basically wait and watch mode. 87% of them are looking at industries that are positively impacted by the current crisis – so there is a shift in the investment lens.
Q1. Entrepreneurs come in many shapes and forms. However in general what impact has the Coronavirus had on Entrepreneurs at large? Which types of Entrepreneurs have been least and most affected?
Let us look at the founders/entrepreneurs by the stage they are in – early stage or growth stage. The ones in early stage may find it difficult to survive as they have very little money, which makes it hard to motivate employees and staff. In growth stage there are two categories – one that have raised funds and one that have not. Those who have raised funds may be in a slightly better situation to ride this trough aided by a little bit of cost cutting and layoffs. On the other hand, those entrepreneurs who have not raised funds yet are in deeper trouble and may be forced to go for a distressed fund-raising round. Unless a start-up is on significant growth trajectory, people will beat them down on valuation at this stage.
The other way to look at entrepreneurs is via their offerings - services vs intellectual property (IP) product. If you are in IP and are well funded, the current crisis practically has no impact because usually creating IP takes 12 to 24 months - be it a wonder drug, Artificial Intelligence (AI), Internet of Things (IoT) or Biotech. Such product-focus entrepreneurs are not necessarily looking at revenues right now and given the nature of the product development cycle, they should be adequately funded to ride this situation. On the flip side, entrepreneurs in the services business do have a dramatic impact as suddenly their revenue flows have stopped. Service entrepreneurs have a challenge to tide over this period especially as no one knows how long this crisis will last.
Over 80% of the founders are worried. They believe that the economy will take from 3 to 12 months to recover. As you can imagine for most of them their company’s revenues dropped to zero or near zero since February or March 2020. Entrepreneurs in industries which either got slightly affected or not affected at all by the current crisis have less worries. For example ecommerce, market place, delivery services, healthcare, EdTech, over-the-top (OTT) platforms, and Esports are businesses that have seen no affect or even seen increase in their revenues. However transport, especially airlines, hotels, food and beverages (F&B), construction, retail shops and malls, Bollywood and many other businesses have seen a crash in their revenues.
Q2. How can entrepreneurs manage investor expectations in the current situation? What strategies should entrepreneurs adopt for client/customer retention/growth in the current environment?
Investors are quite aware of what is going on in the current situation. So the founders need to be transparent and communicate the current scenario and project Plan A and Plan B budgets, and get the buy in of the investors and Directors. It is important to keep them updated on an on-going basis especially as the conditions change over time, as the economy slowly opens up.
Founders need to keep their clients and customers informed. If they have seized operation, please let them know. If you are planning to open up let them know the tentative date. If you have changed your business model let them know, e.g. from retail store to online, from in-dining to take out or delivery. Also if you are actively helping your staff, you should let your customers know how and what.
Q3. Many entrepreneurs are cash strapped these days. How can entrepreneurs keep the staff motivated despite the cash crunch? If your cash flow does not support it, how should you message it to employees should you have to furlough or lay off? On the flip-side, if your cash flow is good, how do you internally communicate that you are in good shape and alleviate the employee anxiety? What expectations /messaging would you give for employees?
The best way to keep the staff engaged and motivated is by communicating regularly. Get on video calls and write emails or WhatsApp messages. Ask them about their and their families wellbeing. If the founder is not transparent or not sharing good or bad news they will lose the trust of their employees. Do not keep the staff guessing. If a layoff or furlough is required, don’t shock them – let them know in advance as much as possible so that they can start planning ahead. Anxiety creates mistrust and demotivates the staff. It will starts rumours that may overflows outside the company.
If the founder has to cut the salaries, they may consider cutting the highest percentage at the top level, and gradually cut at declining levels for junior staff. For example if they need 30% salary cut in the budget, cutting 30% from top to bottom makes less sense. They should cut 50% at the top, and go to 10% for the lowest paying staff in the grid. When the founder informs the staff, they will appreciate it and so will the investors.
Q4. How have your investments and ventures been doing in this time? Is there a way to weather proof one’s revenue stream?
I am an angel investor and an investor in many VC funds. In every fund there are good companies that are either continuing to do well, or are well funded to continue operations for the next 12 to 24 months. There are however some companies that are badly affected, and some of them are having to cut staff and operations to survive. However most companies see this as a temporary pause in action.
Q5. What are some of the crisis you witnessed in your long entrepreneurship and investment career? What was the learning from them?
I have seen quite a few downturns in economy over the past two decades including 9-11, SARS, 2008-09 subprime, 26-11 and now the Covid pandemic. The theory is that great businesses started in adversity flourish in good times. Amazon, eBay, Yahoo were started in the downturn in mid 90s, while the new startups such as Uber, WhatsApp and AirBnB were incorporated during the subprime crisis. The 3 top sectors according 100X.VC survey are Healthcare, EdTech and AgriTech.
The biggest learning is that cashflow is king. If you buy goods at 100 and sell them at 95, that business model is the most likely to get affected. Keeping a fine balance between growth in the beginning and positive cashflow is key to success. Also planning ahead for fund raising is very important. You have to start the fundraising round at least 9 to 12 months before you will run out of money. It takes a good 6 month to fund raise at any level. Also raise a larger round than what you optimistically think you need because you are bullish on your business. It is better to have extra cash in the bank, versus running out of money especially in an unprecedented downturn like what we are facing.
Jayesh Parekh co-founded Sony Entertainment Television, a major television network launched in collaboration with Sony Japan. Prior to that, based in Houston and Singapore, he spent over 12 years at IBM in various senior technical marketing and business development positions. He recently wrote a successful book “What Shall We Do All This Money? Inspiring Perspectives on Wealth” which gives brief glimpse into the life journeys of financially successful individuals, their perspective on wealth, and how it can be used to make one’s life more fulfilling.
He is an active angel investor with investments in various Venture Capital Funds in Silicon Valley and start-up enterprises across the broad technology and media space. Jayesh is an Entrepreneur-In-Residence at INSEAD, a member of TiE Angels, and the Indian Angel Network, as well as a board member of Sanctum Wealth, One Animation and Milaap. He also sits on 3 Investment Committees of Aavishkaar Capital social impact funds. He is a Co-Producer of Jhalki, a film inspired by Nobel Peace Laureate Kailash Satyarthi.
Jayesh did his bachelor's degree in electrical engineering from Maharaja Sayajirao University in Baroda in 1978. After two trimesters, he quit IIM Calcutta and got MS Electrical Engineering from The University of Texas in Austin.
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