With the pandemic and restrictions brought on by the lockdown taking a huge economic toll on everybody, keeping the doors to businesses open has been a challenge for most founders of startups/companies. While some have had to shut down their businesses, others have managed to prevent them from sinking or have moved on to other more profitable ones.
“The 2020 pandemic spoiled the best-laid plans for even the most well-funded startups in India – so you could imagine what havoc it played with founders of early-stage startups,” expresses Anirudh A Damani, Managing Partner of the early-stage micro-VC firm, Artha Venture Fund.
According to him, founders relying on customer capital to fund operations survived (and later thrived). However, founders that needed continuous infusions of money to paper over negative unit economics, got blown out of the water when the funding market froze.
“The lockdown has served as an essential lesson for founders in following the basic economic principle of selling a product or a service at a price higher than what it costs to provide that product. Many founders found this out the hard way, i.e., with a complete shutdown of their business,” Damani explains.
Smart money management tips
However, the fact that this year alone has seen 13 unicorns so far, as compared to the 11 unicorns last year, proves that it is not all doom and gloom.
Hence, while the current economic climate may be difficult, founders can keep their businesses afloat, and even thriving, by being financially prudent.
“Last year, each business’s revenues were affected universally, and founders had to make zero-revenue budgets for the April-June 2020 quarter. However, this year the situation is vastly different, but the treatment methodology is the same,” Damani says.
Here are his money management tips to help founders tide over the pandemic:
Create realistic revenue estimates based on the direct impact of the COVID19 lockdowns on business
Rework expense budgets based on the new revenue estimates:
a. Reduce allocations for spends that do not have a direct impact on new revenue estimates.
b. Put any new hiring on hold unless required.
c. Increase sales-linked pay versus fixed costs
d. Let go or renegotiate payments for infrastructure (rent, utilities, computers, furniture, etc.) that are not required for the sustenance of current operations.
Conserve as much cash as possible and be firm with your team on getting lean
If the business cannot sustain fixed pay for the executives, move them (including yourself) into variable pay models linked to sales and margins.
a. If the startup exceeds its targets, the benefit goes to those that took the steepest cuts in pay
Keep cash visibility of a minimum of 9 months of runway (preferably 12) in your bank account; if you start dipping below that, start raising.
a. Do not focus on the valuation you are raising but that you have enough capital to tide over this period.
b. If you survive the winter, you will thrive in the summer.
Handle personal finances prudently
With the personal financial health of 4 out of 5 founders linked directly to their company's financial health, these are also times when many startup founders have had to dip into savings to run their households.
Until their startups can start supporting them again, Damani gives the following tips for founders to manage their personal finances.
1. Carefully plan and track your budgets.
a. Reduce unnecessary expenses
b. Buy in bulk to avail yourself of bulk-purchasing discounts
2. Pay for things using credit cards but pay the card balance on time and in full
a. You get a 30–45-day breather on paying out
b. But pay on time; otherwise, the interest rates can be exorbitant
3. Find gigs that you could do in your spare time to augment your income
With the pandemic, founders and their families have also had to deal with soaring medical bills. Damani explains that the key to managing medical care is to be prepared for medical expenses before it affects you or your family.
"Keeping a medical emergency fund and buying health insurance with the necessary coverages are very important. These things may seem trivial when you are healthy or when the business is doing well. However, these trivial allocations become invaluable when either of these pillars starts crumbling," he states.