Restartup

A Founder's Guide to Crisis Navigation

Arunkumar Krishnakumar, Maxson J. Y. Tee

• Publisher: Wiley
• Year: 2021
• Print ISBN: 9781119754404
• eBook ISBN: 9781119754626
• Edition: 1
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

Yourcompletestartupdownturn survival guide

Duringamarket boom, startupfundingisin abundance.Butwhen a financial crisis hits, investments dry up, making itdifficultfor newer, smaller outfits to survive.During aperiod ofeconomicinstability, thattask might seem even harder.However, acrisis doesn'thave to mean it's time to shut up shop. Restartup shows howit's possible—bychoosing toembrace instabilityandseizingthenew opportunities itprovides—tostay afloat, and eventothrive.

ArunkumarKrishnakumarand Maxson Tee—techinvestor, influencer, blogger, andpodcaster—usecase studies andin-depth interviews with VCs, CEOs, and academicstoflesh-outanecdotalcrisis-survival frameworks. They introduce youto the concepts, toolsandtechniquestohelpyousailthrough an economic storm.

• The money pyramid—understandyourcrisisfinancing options
• Mental Health –drop the societal taboofor the wellbeing of the company and the founders
• Fundraising psychology—go beyond the deck and the propositiontoget inside your investor's head
• Operational efficiencies—know how to cut back but still hold onto your top people
• Embrace the suck—see how a crisis canopen upunexpectedopportunities

Don't let a crisisgo to waste: stop worrying and usethe proven ideas in this book to turninstabilityinto opportunity—and embrace the wild ride to survival and success.

CHAPTER 1
Even Shit Floats in High Tide

All that glisters is not gold,

Often have you heard that told:

Many a man his life hath sold

But my outside to behold.

Gilded [tombs] do worms enfold.

— William Shakespeare, The Merchant of Venice

Introduction

Five years back, I was pitching to an investor for my venture capital (VC) fund. I showcased the startups I had invested in and explained how well they had all performed since the investment. He was quiet for a few seconds and responded,

“Even shit floats in high tide.”

He had observed that all our investments were made during bull markets. He continued to push me onto my backfoot, saying our investments should withstand a crisis to really stand apart. I was shaken by his comment because he was right. I remember telling myself, ‘This is it, I've lost it'.

All the investments I showcased to him had happened in 2014–2015 when the market was pretty healthy. He had seen through my sales exercise. Somehow, miraculously, I won him over and he became my cornerstone investor. One thing led to another and we later partnered to set up Green Shores Capital. Together, we have so far invested in more than 15 startups, and many more individually. However, the philosophy has often been about assessing how well a startup would perform at times of stress.

In 2019–2020, we have closely followed trends about the rise of investments into late-stage startups, fall in VC investments in Asia, the rise of corporate VC and the rise, and subsequent struggles, of the Softbank Vision Fund. These were macro trends that we have been keeping tabs on. We also witnessed a slowdown in funding for early-stage startups during 2019. However, as the COVID-19 crisis has unfolded, we've seen activity fall off a cliff.

We reached out to all our investee companies, discussed their plans and suggested ways they could navigate the crisis. We made several observations during those conversations. There were differences in the way each of them approached the crisis. We saw nervousness, resolve, confusion, hope and, in a few cases, excitement.

Everyone entered the same crisis, yet the way companies have reacted to the crisis varied remarkably. This is largely because of how they had set themselves up for crisis. That led us to think through the ‘Why?’ behind the way our investees have responded. During our due diligence process at the time of investing in these companies, we analysed their preparedness for a crisis. But very few will disagree if I said, ‘You cannot be completely prepared for a crisis’.

In this book, Max and I will go through the journey of a startup getting into a crisis, living through that crisis and emerging out of it. In the process, we will bring together insights from across the world – from VCs, startup CEOs, central bankers and ecosystem stakeholders. We have chosen a few case studies that we will pick best practices from and highlight them throughout the book.

In this chapter, we will discuss why it is important to understand that the bull (market) has been running for too long. This comes from regularly keeping tabs on the key markets across the world, understanding how the macros affect the startup ecosystem, assessing the potential scenarios that could unravel and staying sufficiently nimble to respond effectively.

If you are an entrepreneur, you might want to ask, ‘Why should I be interested in all that? I have enough on my plate with just building my product and selling it’. Remember, successful entrepreneurs are generally compensated so well, not just because they have built and sold a product. They equip themselves with information to navigate their firms through both market highs and lows. Now, let us turn to why the macroeconomy matters and how an understanding of that helps an entrepreneur to make informed decisions.

The Macros Matter

Be it in fitness or finance, the macros matter. Let us first start with the scenario we were in before the COVID crisis hit. A raging bull market that just couldn't be stopped. The Brexit vote was finally behind us and market sentiment had improved. Europe saw a huge influx of institutional capital and there were VC funds with a lot of dry powder*.

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*Dry powder refers to the amount of cash reserves available with VC and private equity funds.

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We knew things were unsustainably rosy and on the surface we celebrated every single win: new client contracts, investments at crazy valuations, expensive hires, glossy PR and the list goes on. The Burn rate* for businesses was so ridiculously high that we asked ourselves, ‘What do they spend so much money on every month?’; however, we ignored them because times were good. I wouldn't go as far as claiming there was a systemic bubble forming before the COVID crisis hit, but there were sporadic signs of an overheated market.

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Burn rate refers to the cash outflow that businesses incur every month.

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Startups claimed crazy valuations during investment rounds. I remember sitting at a pitching lunch session at Mayfair in London. There were about 15 family office and VC investors sitting around the table, and there was one firm pitching to us through the expensive lunch that was served. The firm pitched for a £12 million funding, had an artificial intelligence (AI) component that was revenue-generating and were building a Blockchain component to enrich their product offering.

They had a burn rate of £1 million per month, had raised £9 million only a few months ago and had made about £300K in revenues over the previous 12 months. They weren't fundraising to grow their clientele on an already revenue-generating AI component; instead, they chose to invest into a potential add-on using Blockchain. The £12 million, they claimed, would help the whole product to be rolled out in 9 months' time, after which they were planning to fundraise again. They were valuing their firm at £72 million.

Pitches like these make me cringe. However, they did win some investors from that pitch. Those were times when investors had a lot of capital. When we see consistent deployments of capital into low-quality propositions such as the one I described, it is often a sign that people do not know what to do with their money and are desperate to deploy. That leads to bad investment decisions, and when a wave of bad investments collapses at scale globally, it can result in a recession, as it did in 2008.

We saw a bit of that when Softbank Fund I struggled after the WeWork episode and hasn't been able to raise its second fund since. If you are a startup, you could be asking, surely Softbank is a multi-billion-dollar player, and why would it have a capital crunch? Hold on to that question; it will be clear when we discuss the capital pyramid.

During several events, discussions and social media interactions, I have been asked why VC investors don't deploy in certain types of assets or at certain times of business cycles. That is because not all the capital deployed by a VC is from the partners of the firm. There are...

Table of contents

• Cover
• Table of Contents
• Title Page
• Copyright
• Dedication
• Foreword
• Preface
• Acknowledgements
• About the Authors
• CHAPTER 1: Even Shit Floats in High Tide
• CHAPTER 2: Hindsight's 2020
• CHAPTER 3: Be Your Own Shrink
• CHAPTER 4: The Surgical Strike
• CHAPTER 5: Check Your Mirrors
• CHAPTER 6: Map the Trip
• CHAPTER 7: From Fiats to Ferraris
• CHAPTER 8: Hit Refresh
• CHAPTER 9: Winner Winner Chicken Dinner
• Glossary
• Index
• End User License Agreement