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Lost revenues the biggest challenge for startups, says SEA Founders report

SEA Founders is a community for the entrepreneurs behind Southeast Asia’s Series A and B tech startups.

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The COVID-19 pandemic has infected more than 460,000 people worldwide and paralyzed the global economy. Several countries have declared national lockdowns, while many others restrict residents’ movements to prevent further transmission of the disease, the crisis has forced employees around the world to work from home. However, not all companies can afford this and have to place employees on unpaid leave or even dismiss them.

According to McKinsey’s latest report, “COVID-19: Implications for Business,” the number of corporate layoffs and bankruptcies will rise throughout 2020, the GDPs of most major economies will contract significantly this year, and a recovery will start only in the second quarter of 2021.

In view of this situation, the startup community SEA Founders recently conducted a web discussion that involved founders of 21 startups across Southeast Asia, including PouchNation, Glints, and Perx Technologies, debating various challenges and business strategies to overcome this challenge. The discussion was then collated in a report titled “SEA Founders’ COVID-19 Challenges and Questions.”

Five areas of concern for startups

The report found five key areas of concern for the startup community—revenue, cash, costs, employees, as well as funding and investors. Delayed revenues and worrying burn rates are cited as top challenges arising from the pandemic. Furthermore, the current circumstances, limiting offline activities and business travel, can cause longer sales cycles, which lead to declining revenues.

“This is serious because when your revenues are flat or declining, investor confidence in your business will also drop and it could lead to down rounds,” Tomas Laboutka, founder and board member of SEA Founders told KrASIA in a recent interview.

Tomas Laboutka, founder and board member of SEA Founders. Photo courtesy of SEA Founders.

Laboutka believes that in order to ramp up revenues, companies should limit the scopes of projects so they can shorten the sales cycle. “When a business is slowing down, obviously the first thing you want to do is to make sure that your current customers stick with you. So you have to maintain this relationship by offering products to meet changing market needs,” he explains. Companies should look at what customers need during these unpredictable times, find new revenue streams, and build more strategic partnerships.

While the health crisis will severely reduce cash flow for businesses, startups have several tools to mitigate the effects of the economic slowdown, such as bridge rounds of financing from VCs, government-supported loans from banks, and loan renegotiation.

At the same time, startups will need to reduce their costs without jeopardizing their ability to produce and deliver value. The report added that they should talk to vendors and partners to lower rental prices for cloud services, cut ad spending, and reduce marketing costs. On the other hand, the founders agreed that fundraising delays did not pose a major problem.

“A crisis doesn’t mean that everybody needs to suddenly raise funds, especially since the process takes time,” Laboutka said. “First thing you want to do in a time like this is to secure your employees and customers. And in order to do that, you need to preserve revenues by diversifying revenue sources and tapping into different verticals, so that your business becomes more resilient. Healthy cash flow will minimize the need to lay off,” he continued.

The importance of leadership

The report emphasizes that the unpredictable nature of the crisis means that executive leaders have little or no time to prepare—and this is when leadership is tested. While not many companies can afford having employees work from home indefinitely, layoffs should be the last option to reduce costs.

The report suggested various solutions to maximize productivity during this time, such as daily huddles or stand-ups to ensure employees are on track. Leaders should always be present to take questions and help remote teams to stay aligned and focused.

Founders should also ponder taking cuts themselves before reducing salaries or planning layoffs. “Leaders should lead by example and make sacrifices by cutting back salaries of senior leaders across the board in order to preserve the team and avoid layoffs,” says Laboutka.

Take the example of Gojek, which recently launched a support fund to help drivers, merchants, and other partners whose incomes have been impacted by the outbreak. Gojek’s co-CEOs Andre Soelistyo and Kevin Aluwi, as well as the senior management team, will donate 25% of their annual salaries over the next 12 months. Contributions will also be drawn from Gojek’s annual salary increase budget and other parties, mainly corporate partners. In the US, several airline and hotel CEOs are also taking pay cuts amid the COVID-19 pandemic.

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Despite the challenges, Laboutka is confident that VC firms will continue to invest this year.

“Investors will probably look at their current portfolio companies and ask concerning questions about how they will survive, but overall, I don’t think the investment will drop significantly,” Laboutka said. “Globally, there are investors who are investing heavily because they envision that some companies will survive and even grow stronger from the current crisis, and these companies will thrive when the economy resumes growing.”

SEA Founders is a community of Southeast Asia’s Series A and B tech startup founders. It helps its members to scale faster by accelerating learning and fostering deeper relationships throughout the ecosystem. Some of the startups in its network are Fave, iPrice, and Ajaib. SEA Founders regularly conducts discussions on various topics and will release another report related to COVID-19 pandemic by the end of March.