While the globe struggles with the COVID-19 pandemic and its resulting externalities, startups remain one of the several groups to be adversely hit. Ranging from cash flow issues, to supply chain disruptions, to diminishing customer demand – startups are battling various business challenges through this time. To help founders tide through these ‘war times’, Blume Ventures put together the Davids vs COVID Series – a series of interactive webinars for Blume portfolio founders (or ‘Blumiers’) to learn from industry experts and seasoned founders who have built rocket ships through past recessions.
As a part of the Davids vs COVID series pioneered by Blume, we invited Prakash Chellam of Marathon Edge (ex-Infosys sales, tech banker at JM Financial) to speak about how B2B companies can weather this storm. The session also saw learnings from Blume’s hero B2B portfolio founders – Avlesh Singh from WebEngage (marketing automation software), Rishi Kulkarni from Revvsales (pricing and quoting software), and Shesh Rao Paplikar at BHIVE (corporate coworking space).
Here are the 5 key learnings from the session:
Founders need to start looking at four key cash related items:
How much cash do you have in the bank?
How much implied runway do you have?
What is the risk of your receivables?
How can cash outflow be minimized?
The key thing to remember about cash burn (cash outflow minus cash inflow) in war times, is that revenue is outside your control but costs are not. Every aspect of your business needs to be looked at from a cost perspective, and founders need to preserve every dollar of cash in the bank they have.
This would also be a good time to push out joining dates of new hires or consider deferment of offer letters. While steps like these might hurt the brand in the short run, they have been taken in all prior downturns and helps the company preserve cash in order to survive for the long run.
Founders should consider all their major expense items and cut out discretionary expenses. Consider if offshore internally based teams can be relocated to cheaper locations. For more technology companies, cloud servers are a big expense item. Consider if you can reduce this cost through acquiring credits, requesting discounts, or rewriting code more efficiently.
Behaviour of key stakeholders in your customer enterprises is fairly predictable in war times, that is, no new capex items tend to get cleared, and no company moves fast on new product decisions. Thus, it is very common to have fewer new leads, and slower moving conversations. Existing leads often postpone decisions, ask for discounts, or decide to not take the product altogether.
In earlier days, leaders would cut down on travel and events related to Sales and Marketing efforts. The modern day forms of those channels are Google and Facebook ads, marketing software, and other digital marketing tools.
However, physical mails sent during these periods often have a high success rate. Physical notes sent to key stakeholders and customized based on their profile and needs, have a ~20% conversion rate from mail to meeting.
As markets start moving towards an upswing, it is essential to target the most efficient markets first. Prakash points out that North America tends to move faster than Europe in decision making and recovery, and is thus more likely to get to business-as-usual faster. However, it is important to note that markets today are dependent on the spread of the virus, and North America is seeing the peak of the spread after Europe.
Many founders are curious about how best to attract new customers during war times, and how to handle customer requests for discounts or contract renegotiations.
Working with existing customers
Prakash noted that while it may be common for existing customers to request discounts or fee-free-months, very few customers will actually want to renegotiate contracts during this time. Re-negotiating contracts requires Legal and Finance teams to come together and work with the service provider to agree on new terms – given the current situation this process is hard to pull off.
However, it is common for 20-25% of existing customers to proactively reach out for discounts, payment deferrals, or in dire cases contract cancellations. While force majeure clauses have not historically been used in these cases, they may be used during COVID-19.
It is not recommended to go down legal routes with customers – even when renegotiating contracts may not have a legal basis. Customers with serious cash flow issues feel that the industry should share their burden – so enterprise companies will often have to work with customer requests for small discounts or deferred payment options. Some companies are also known to propose to customers that they can provide credits (to be used later in the year for extensions or new features) instead of providing discounts immediately.
Working with new customers
Prakash pointed out that new logo sign ups are expected to be low during this period as companies are postponing new expense items. New logo sign ups can be increased through both internal and external measures:
Internal Measures: Incentivize Sales and Implementation teams with a 3-4x higher bonus than normal, on a deal by deal basis. It is common to see these bonuses being paid out on a monthly basis, or 30-45 days after each sale is done.
External Measures: Offer early signing discounts or upfront discounts to new customers. Instead of giving the discount amount right away, make the customer tell you when they can sign first – since giving away discount numbers may not guarantee them signing, but the discount number stays with them. Early signing discounts commonly fall in the 20% range.
It is worth noting that given the current business circumstances, it is likely for these measures to not work, and thus founders should be prepared for low revenue numbers.
Avlesh Singh notes that for horizontal software companies, founders should look at which industries have not been served yet, which have been under served, and which have seen high uptake during the crisis (online education for example). Consider how sales channels can be redirected towards industries that still have high potential in these times.
During war times, most companies will see some teams being under-utilized. In this case it is offline sales, new customer onboarding, etc. It is important to reorient these resources and define new tasks for them that meet the need of the hour.
For instance, Sales teams should look at previously lost leads rather than open new conversations. This is a good time to take a deep-dive into previously lost leads to understand 1) why the lead was lost? 2) what new features would attract them? 3) what is the profile of the decision maker? 4) does the person with the relationship still work with that company? Profiling these decision makers and understanding what can be done to win these leads going forward, will allow Sales teams to hit the road running when the market goes back to normal.
Customer Success teams also play a crucial role in war times as they have the most direct contact with existing customers, and bear the responsibility of revenue retention. Founders should look to maximize resources available to Customer Success teams by re-orienting teams like Billing, Product, and New Customer Onboarding to customer success projects. This is also a good time to focus on training and education for existing customers, that helps build stickiness and forge great relationships.
As most teams have been working from home for a while through the COVID-19 crisis, reduce timelines of delivery to your teams to ensure high productivity.
On similar lines, while engineering talent may not be pulled into implementation / trouble shooting for new customers, they can be used to improve the product during these times. For companies that have sufficient cash in the bank, this is a good time to invest in the product, add new features existing customers have been requesting, fix previously ignored bugs, etc. so that Sales teams can offer a state of the art product when the market goes back to normal.
Rishi Kulkarni, who has worked with startups during both the 9/11 tragedy and the 2008 recession points out that quality trumps quantity in these times, and low sales volumes can be used as an engineering opportunity. Technology teams should focus on adding analytics into their product and doubling down on product/video content generation. Measures like this ensure that your existing customers do not churn out easily.
In conclusion, it is essential for founders to:
Closely track their cash position
Be prepared for tough conversations with customers
Consider pushing out offers to new hires
Cut out discretionary spending
Assess how resources within the team can be reoriented to achieve efficient output
Modify sales channels
Focus on product quality
While some startups might find it difficult to survive these unprecedented times, many others have the ability to come out stronger and capture more of the market than ever before.