An interview by Lilly Drumeva-O’Reilly
We live in isolation and a state of emergency. The first priority for all of us is to protect ourselves and survive. The second is how we will survive financially, how to keep our business, how to reorganize, so things will still continue. Every day is a test for us on how much to actually be careful, how much to go out, to do our jobs, how much to avoid physical contact, how long to wait until a doctor’s appointment etc.
In today’s interview, I will ask about how start-ups survive in the current situation and what the challenges and measures they take to deal with it are. I will talk about this with Rumen Iliev, a partner in a large venture capital fund. He is also a strategic advisor to the Bulgarian Entrepreneurship Center Foundation, where he supports projects in the education and IT sectors.
How do start-ups survive and what are the main problems at the moment?
Startups are largely behaving like any other business in this situation. There may be small specifics that make the situation more difficult for them than for a large or profitable business. The goal of start-ups is to find a business model /repeatable and scalable model/ to help them escalate their sales /or their customers/ without proportionally increasing their costs in order to become really big businesses. When you want to be very big, you usually strive to become a leader in a niche market and fight for market share, not for profit. That is, most early-stage companies are not profitable businesses, but rather fast-growing businesses in which a large portion of the funds are spent on acquiring new customers or users according to the business model. They lose money at the expense of quickly acquiring customers or users. Startup companies, while not focused on profit, usually do not have a large buffer of accumulated profits from past years and the like. That is, they usually have money for only a few months of life. So delayed sales reduce their cash and put them at high risk of bankruptcy. Unfortunately, an additional challenge is the fact that access to capital is becoming more difficult.
Start-ups and investors like us live in a world of symbiosis and a world of natural selection (survival of the fittest). As a company starts to grow rapidly and chases a large market niche, many investors want to invest in it, its cost of capital becomes low, its valuation grows, and access to liquidity and investment capital is easy for that company. On the other hand, if a company does not grow fast enough or changes in its niche are negative (a lot of competition or its customers do not buy the product or technology it relies on, it does not advance on the market etc.), access to capital for it is difficult and ultimately without liquidity from investors this company will either become profitable and support itself thanks to its customers or die. A company becoming profitable at an early stage is not a bad thing and is much better than not surviving. However, if this company becomes profitable at the expense of its growth and its competitors succeed, they will simply outperform it and it will not have a chance to become a market leader. It will become perhaps an SME – a small business or a local business, but it will cease to be a startup, because for each business there is a time and moment and if the right time is missed, the market is distributed and the chance of big business decreases. This is why start-ups are currently juggling constantly, balancing growth, profitability and survival. At the moment, of course, the priority is survival – both for companies and people.
What measures do your investors take to handle the crisis?
As it is with normal businesses so is it with start-ups: the first focus is on reducing costs. First – renegotiation with all suppliers about reducing prices including rent, software products and more. Second – limiting any future costs – logically those related to the future employment of people as well. The third is to reduce salaries, first of the highest earners and, if that is not enough, of everyone. Fourth is the reduction of staff. If the company still does not have a runway – a buffer for 12 months of life, then inevitably comes the reduction of all costs which do not determine the survival of the company. Companies mainly focus on retaining existing customers. In this environment, it is difficult to attract new customers so the focus is not to lose the current ones. Grace payment periods, free features or discounts when re-signing contracts and all other allowed methods are used for this mission-critical task. Rethinking the sales model is also an important element. If by now a company had to maintain a team of people (sales executives) to make personal meetings with potential clients, group presentations of different departments, etc., this model might need to be rethought. This also applies to how the product is put into use and how it is upgraded by the customer, etc. The effort here is to make things happen without physical contact in a new way that is in line with new realities. Rethinking marketing – simply reducing marketing and advertising costs is not the solution. We know this from the past crisis. It is better to rethink the purpose of marketing. Whether by attracting sales leads – prospects that will not be bought right now, marketing efforts should not focus on building a brand, or should focus on retaining existing customers and business or on creating awareness so that the moment sales become possible, the company and its products are shortlisted in the heads of potential buyers and in their list of pre-purchase valuation products. It is important to think of other channels, like partners and partner organizations, that manage to sell even in these conditions, etc. etc. If the foundation of the business has not changed by the current situation and the company is confident that it will survive, then it might be a good time to make an effort to create a great product that will be sold much better when the environment improves.
Are there companies that benefit from the situation?
Start-ups suffer or profit from a state of emergency just like any other business, depending on the area in which they are located. For example, if a company is in sectors such as tourism or fashion, it is almost certain that sales are currently poor. On the other hand, if the company is in sectors such as digital healthcare or digital communications, supplies, etc., it is likely to see strong growth. In our portfolio there are also companies that sell better in the current situation in sectors where there is a high demand at the moment, such as digital education, digital healthcare, digital transformation and others, but in the context of a subsequent recession, most start-ups are more likely to have difficulty in sales and access to finance. This is also true for most businesses and the deep recession that is expected in the next 18 months will not be good for anyone, even those companies that are currently selling well.
How do we plan business development when there is no clear evidence about how long the pandemic will last?
We need to be objective and responsive, but we must also be positive and look for ways to implement new ways of working and innovative products. Business needs to survive, but that may not be enough. It must also keep track of new ways of doing things, being careful not to be exposed to a fundamental change brought about by the current situation, which will continue in this niche. The business also has to make plans and change them quickly. Pandemics do not last forever. After some months, the worst ends. The recession will not last forever either. In a year and a half or two it will pass. The company has to not only survive but to emerge with stronger positions. Being too cautious about trying to be profitable at all costs and holding a bank account for 3-4 years as a buffer may be just as fatal to its future as not responding adequately to short-term challenges, or being too optimistic about projections.
Rumen, I thank you for this interview and wish you all the best!
Rumen Iliev is a partner in LAUNCHUB Ventures – a seed stage fund focused on investing into technology companies. Rumen wears many hats – a mentor, a strategist, an advisor, sometimes the devil’s advocate, and sometimes “the guy who makes the slides”, when the teams he engages with are too busy closing deals. His goal is simple: to help entrepreneurs achieve more. Rumen traded his management consultancy practice to enter the VC world in 2012 and has been part of LAUNCHUB since the very first day. Previously, he held various positions in multinational organizations in the Czech Republic and Bulgaria. Rumen holds an Ms in Finance from the University of Economics, Prague, the Czech Republic, and an MBA from the IEDC – Bled School of Management, Slovenia.