Ten Ways to Survive the Crunch

Any economic downturn makes start-up companies in particular prone to go bust – so then, let’s hear advice from a start-up insider and investor on how to prepare to keep young companies afloat. William Klippgen , the co-founder and executive director of the Singapore seed investment fund BAF Spectrum Pte Ltd will share with you ten ways on how to survive the credit crunch.

We all know that the only way to survive in the long term is to be profitable. For a start-up, profitability is often years away, especially for the ones that are preparing for a market still in its infancy. Other products just take time to develop and early-stage, risk-seeking investors are needed to finance the first part of this journey.

In the current global recession, risk capital has suddenly become scarce. Working with start-up companies in Asia in the last three months, I have seen boards adopting a mix of the remedies suggested below. Hopefully, they can be useful for others as well.

Ten ways to survive the crunch:

1. Keep a buffer of three to six months of net cash burn by continuously adjusting your burn rate: The difficulty trying to adjust the net cash burn is when to reduce it and by how much. We suggest simply agreeing on a buffer in terms of time until cash runs out. It is easy for both management and the board to relate to this number. We have asked CEOs to adjust burn at the end of every month, so as to always keep enough cash and short-term receivables to last at least three more months. In that way, there is no need to keep discussing specifics, it is up to management to cut spending and staff and the board can focus on the revenue side.

2. Be transparent with your team: We ask CEOs to be completely open about the state of their companies in weekly, all-hands meetings. Start-up teams are usually small and closely nit; facts are far better than rumors in difficult times. Since many companies give stock options to employees, it is only fair to let them be part of the hard decisions that have to be made. And, staff members that are most likely to appreciate this openness are also the ones you are most interested in keeping for the long term.

3. Ask everyone to take a progressive pay cut: Higher paid staff can usually take a higher pay cut, but be sure to understand the financial situation of each member on your team. If everyone agrees to a substantial cut for e.g. 6 months, we believe the team has a good chance of remaining motivated and productive. In particular, we even see some founders take no salary for an extended period of time, sending a strong signal of commitment.

4. Let go of staff, but offer them to hang around: Keeping enough cash for survival often means letting good people go. Be creative and offer them to stay to e.g. consult or do other business from an environment they know and enjoy. Do not charge them anything for this. Given that this works out, it can also boost morale of the employees still on your payroll and the team remains intact. To make up for reduced staff, use online outsourcing sites such as www.elance.com or www.99designs.com to provide cheap services at competitive rates.

5. Free up office space and rent it out: Letting people go and compressing the space you use, can free up significant space. Perhaps you planned on growing further and already use more than you need. Get another company on your premises, ideally a possible partner or customer or one that will add creativity and fun.

6. Make board and advisory board members join the sales team: This is the time to use the network and experience of your extended team. Many board members actually want to get their hands dirty, but are usually held back by management. This is the time to let them loose and let them sell for you.

7. Revamp your web site: The last thing where would like to cut spending, is your website. A strong, online presence with easy access for potential customers to contact you or even buy your products, is nothing but the most cost-effective marketing tool around. Check the cost of customer acquisition through Internet marketing as compared to traditional channels and adopt the best price/performance mix.

8. Invite your closest competitor for coffee, it’s time to talk: Your competitor might be your best future partner. Given mutual respect, a merger might be the best option for both of you if it gives easier market access and reduces costs.

9. Monetize your existing customer base in new ways: Often, your customer base is a demographic subset that is interesting for other products or services than your own. As long as your customers find the new offerings relevant, it will be well received also by them.

10. Barter equity for marketing: A recent trend in Asia is for some media companies to exchange advertising against an equity stake. In the absence of cash, and with companies spending dramatically less on marketing, this is a wonderful way to get relatively high media visibility with only a limited dilution for your existing shareholders.

At last, keep the option of hibernation open if cash simply runs out. There is nothing better than putting your company on hold for a limited period and keep your main clients somewhat happy. Former employees might be willing to work part-time and on a project basis. As soon as your target markets recover, you can hire back employees and gradually start spending again as investments and revenues find their way back to support your dream.

Article photo courtesy of Onohoku

William Klippgen is co-founder and executive director of the Singapore seed investment fund BAF Spectrum Pte Ltd. He was the co-founder of European comparison shopping site Kelkoo.com and advises and invests in start-up companies in Asia, Australia, and Europe. He can be contacted at william.klippgen@bafspectrum.com

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