Navigating COVID-19 – Part 2… Leveraging cash to win
Updated: Apr 26, 2020
Firstly, if your company has a pile of cash, be very thankful. You are one of the lucky companies. You have a huge opportunity to benefit relative to your competitors in the market. Many of them will not be so fortunate.
While you may think that you are sitting pretty – cash and time on your side – you cannot afford to be complacent. Periods of economic dislocation disproportionately create the winners of tomorrow. The technology companies that successfully navigated the global financial crisis (GFC) are the dominant players today. This is your chance to beat your competition and to emerge as the leader in your market.
Perfect planning (or just bloody lucky)
At Aconex, we were fortunate to be in a strong position at the start of the GFC; well capitalised but still needing to plan our way through a difficult economic environment. Aconex was booming. We were growing fast, at over 100% year-over-year, but controlling costs was difficult and we had a high burn rate of just under AUD 1 million per month (at about 25% of revenue of just over AUD 40m.)
We had been working on a capital raise since mid-2008, in response to inbound enquiries from US venture capitalists. I spent a lot of time in Silicon Valley, up and down Sand Hill Road, speaking to potential investors. While the US economy was already weak, our strong growth and global coverage (combined with being one of the first vertical SaaS companies) had generated significant interest from potential investors. Eight growth equity investors submitted term sheets before we decided to proceed with an investment from Francisco Partners – AUD 57.5m including an AUD 25m secondary sell down for current investors.
Everything looked good. The deal was done, and the cash was expected in a couple of weeks. The timing was perfect as Rob was getting married a couple of weeks after we signed. So, I headed off to Rob’s wedding (in Switzerland) with my family, feeling fantastic about Aconex and the world in general. The wedding was great - the bride turned up, we celebrated with friends and afterwards enjoyed a nice holiday in the south of France.
On our way back to Australia, we had a stopover in Hong Kong. Arriving at the airport I saw the headlines – Lehman Brothers had imploded. While the deal was done, we had not yet received the cash. We had a stressful couple of days waiting for the money to hit our bank account. On the day it was due, Rob had one of his least productive days ever; hitting return every few minutes to see if the cash was in the account.
Finally, towards the end of the day, it arrived, and we celebrated with a few beers. But the celebration was short lived. While we had a pile of cash it was clear that the economy was going into freefall.
The growth plans that we had presented during the fundraising were turned upside down. In the space of a few weeks we went from planning a rapid hiring spree to laying off staff. We reworked our plans to ensure Aconex could reach break-even, on the cash we had, even with limited revenue growth. Over the next 6 months, revenue cratered – from 100% year-over-year growth to flat. New projects stopped and sales inflow dropped dramatically. Dubai, which was about 40% of our revenue, ground to a halt. We reduced our workforce in the Middle East by 80%, from 150 to less than 30. It was tough.
But we were fortunate – if our fundraising had been completed two weeks later, we would not have raised capital. We would have been in a world of pain and I honestly don’t know how we would have made it through. I like to think we would have found a way, but it would have been brutal.
Your last round….was your last round
When you have cash, it’s easy to be overly optimistic, but you risk burning money unnecessarily. Just like companies with little cash, you need to do all you can to extend your runway. Don’t plan for a future raise as it may not succeed, or if it does, it is likely to be on terrible terms. So, you now need to treat your last round as your last and final round before reaching break-even.
Plan to bring the company to a break-even position with the cash you have, using conservative revenue projections. Model multiple scenarios for different revenue projections to stress test your assumptions. As entrepreneurs we are positive people so can be overly optimistic. Adjust for your bias and be conservative.
Here are five principles for navigating the crisis with cash:
Focus on your core business. Prioritise your top initiatives and stop everything else. As an entrepreneur that wanted to do everything, at Aconex I regularly made the mistake of trying to do too much. When we ruthlessly prioritised and focussed on our core business the company was more successful. Challenging times can be the catalyst to make hard decisions – don’t waste a crisis to make the changes your company needs.
Save every dollar you can now so you can invest in the rebound. Set clear timelines and decision points, so you don’t drift. While you have cash and time on your side it is important to make decisions quickly, to maximise cost savings. Review the cost savings list from the previous post. While protecting the top initiatives of the company you must save money wherever you can. The potential return on a dollar of investment when the economy rebounds is much greater than on a dollar invested now. Every dollar saved today and invested in the rebound will have a greater impact on the long-term success of your company.
Clearly identify the growth initiatives you will supercharge. Try to define what the rebound looks like for your company so you don’t invest too early. Establish trigger points, based on clear data, to release this investment as the economy improves. At Aconex, during the GFC we thought the economy was improving and started to ramp-up spending, but we were too early and wasted cash before our customers really started buying again after 6 to 9 months. Prepare for the rebound and put your foot on the accelerator as the economy picks up to outgrow your competitors.
Tune costs to revenue. Tune costs more tightly to revenue to allow the company to flex-up spending as revenue increases. This can be tricky, as both the strength and weakness of technology business models is the high gross profit due to low variable costs and high fixed costs. The model is great when the company is growing, and profit margins are increasing, but becomes a challenge when a company is flat or contracting. Try to make your key expenses more variable so that support, marketing, sales team increases, and R&D spending grows in line with revenue.
Forget about raising money. While Venture Capitalists (VCs) may say they are still investing (it costs them nothing to say this and kick some tyres), fewer VCs are actually investing due to uncertainty and the need to reserve funds for portfolio companies in distress. And even if VCs are investing, valuations have dropped. Finally, remember that investors (even existing shareholders) are not aligned to founders. While risky, some investors will be comfortable running an investee company hot because it increases the potential upside if the company delivers. If it doesn’t work out the investor now has the opportunity to invest more when the company needs capital and the investor has increased negotiating power. So, unless you are desperate, don’t waste your time fundraising at this time. Rather, protect your cash and plan to get to break-even.
By planning to reach break-even and focussing on your top initiatives, you can save money to invest in the economic rebound, extending your lead on competitors. The current environment is tough, but it is also a massive long-term opportunity for start-ups with cash that make strong decisions.