26. Five critical steps to save your startup during a catastrophe like COVID-19

The COVID-19 pandemic will have a catastrophic and probably long-lasting impact on many businesses. During any economic crisis, startups need to take immediate and radical action to stay alive. While I wrote this in response to the pandemic, the advice applies to any situation creating an existential threat to your company.

My most significant experience with this kind of challenge was in the aftermath of the tech bubble bursting in 2000. Everything in the dot com sector seemed to grind to a halt. Surviving required that we significantly change the way we operated. The following five actions saved the company.

1. Reset Expectations

Realize that your next round of funding may not happen for a long time. With the massive drop in the stock market, most investors are feeling destitute and looking for stability, not high-risk investments. If and when you do get funding, it may be less than you might have wanted, and at a lower valuation than you were expecting. When the tech bubble burst, Anonymizer has its next round of funding fully negotiated, but it evaporated quickly in the glare of the new reality.

2. Seek Opportunity

These moments of great challenge often come filled with opportunity. But this is not a time to be mercenary, which can create a huge backlash. Instead, look for ways in which you can help legitimately address the pain of others. Can you lean into the problem and apply your solution or capabilities in new ways or with new customers? The 9/11 attack happened while Anonymizer was still deep in the post-bubble doldrums. We immediately started soul searching for how we could contribute. We saw that the FBI had created a “terrorist tip site,” the design of which would put the life of anyone with real information at risk. We reached out and offered to set up a free, secure, and anonymous gateway, which processed over twenty-five thousand tips in the first few months. While the project generated no revenues at all, it did create goodwill and relationships that completely reshaped the company over the following years.

3. Hoard Cash

Cash is king at times like this. GAAP and other accounting rules are for normal times. During a crisis, the only thing that matters is your bank balance. Hoard cash like the most rapacious dragon you can imagine. Be like Smaug.

Start focusing on immediate income generation. You need to put any activity that will not yield cashflow within thirty days on the back burner. Accelerate any revenue you can. Incentivize your customers to pre-pay or to pay from longer terms. If you have goodwill with customers, this is a good time to lean on them for help. Many small businesses are generating cash right now by asking established customers to help keep them afloat.

4. Slash Costs

On the other side of the cash flow equation, start cutting expenses ruthlessly. You will likely need to live off your internal resources for a long time, so extend your runway as much as you can. Start by looking for any expenses that are a luxury rather than a necessity. Immediately defer any leases, services, subscriptions, contractors, or facilities not vital to the business. Look hard and be brutal.

5. Don’t Pay Your Bills

The next suggestion is a bit more radical. If you are not going to make it with the other revenue and expense suggestions, consider not paying some of your bills at all. If a vendor is not in a position to shut down your business, then tell them payment will have to wait.  Bills that would get paid are for things like power, internet, hosting, and rent. Even in those cases, it may take quite a while for service providers to shut you off, so it might be worth it to delay them as well. When you are up against the wall, you have more leverage than you might imagine.

Start with transparency. Let the vendors know your real situation, how you plan to get through it, and when they might expect to get paid. What can a creditor do, other than turn you off, if you don’t pay? If they try to sue you for payment, you would simply declare bankruptcy, and they would probably get next to nothing. Their only chance of getting paid is to sit tight and help you get back on your feet. If they don’t want to wait, you might offer to settle the debt for pennies on the dollar. In our darkest hours, Anonymizer cleared off $250k owed to a vendor for just $25k.

The ”Cockroach” Strategy

I call this the cockroach strategy. They say that, even after a nuclear war, those little critters will still be running around. You can’t win if you are not alive. Surviving gives you a chance to find opportunities to grow and prosper on the other side.

Focus internally on the fundamentals of your business. Challenging times like these forged many of the most successful companies. You will need to be your own lifeline. Investors probably won’t come to your rescue. After a year of extreme belt-tightening and revenue focus, with less than 30 days of working capital in the bank, we finally lived to pivot to a strategy that generated rapid and highly profitable growth.

If you have a story of survival through lean times, please share it with the Boot community down in the comments.