If you’ve been fortunate enough to secure VC funding in the not too distant past then you might be better positioned than most to weather the Covid-19 storm. No one knows for certain how long the economic lockdowns in place around the world will last, but if you have a runway of cash that was intended to last twelve or eighteen months at your disposal, there is at least an option to cut down on discretionary spending while putting the emphasis on continuance, survival and ensuring you have money in the pot when the crisis ends and demand picks up. Cash management seems likely to be a business priority for the foreseeable future.
Coincidentally, just a day or two before the United Kingdom’s partial economic lockdown came into force, I was scheduled to talk to Fergal Mullen, a partner at VC, Highland Europe, on the topic of capital efficiency. In his view, the ability of businesses to grow sustainably without burning through huge amounts of capital is an underrated metric in the VC world. And given that Highland tends to invest at a later stage – certainly once businesses have developed a product and have revenues of $10 million or more – it’s a metric that he and his colleagues keep a close eye on.
By the time the call takes place, things have moved on. Speaking to me from Geneva, Mullen is already in lockdown situation More evidence of the fact that right across Europe an economic crisis is taking hold. Inevitably our conversation ranges more widely than originally arranged.
But let’s return for a moment to the topic of capital efficiency. As Mullen explains, as a later stage investor in technology, Highland Europe tends to be impressed by businesses that have either bootstrapped their way to success within their chosen market or used investor cash well.
“We see examples of businesses that have put $250,000 of their own money into the business and grown through cashflow – and we like that,” he says. “Equally, we’re impressed when we see a business that has taken investment, say $4.4 million and generated revenues of over $40 million.”
So, from the perspective of Highland Europe, evidence of good financial stewardship can be a key factor in attracting further investment. And for good reason. As Mullen points out, Highland is investing cash from institutions such as pension funds and family offices. These investors want to know their capital won’t be squandered.. “We have a fiduciary duty to them,” he says.
“The advice I would give to businesses,” he says, “Is to focus on the unit economics.”
Or to put it another way, ensuring that not only is the price right for a product but also that the cost of acquiring customers and delivering the product over the lifetime of relationship will deliver not only revenues and growth but profits.
Which raises the question of how much money businesses should be prepared to spend on acquiring customers in order to grow revenues – and to what degree is their growth model sustainable. For instance, do the marketing costs associated with acquiring customers result in the creation of a sustainable and profitable customer base? Is a company succeeding in retaining customers and growing average order values, or is it spending to shore up churn to other suppliers? In other words, are the finances negative or close to negative, even if the revenue figures imply growth? And if so, is there a credible means to get out of that situation.
Which is all well and good, but I am of course talking to Mullen at a time when unit economics may be the last thing on the minds of business owners that are facing the prospect of closing or scaling back their operations at a time when customers and suppliers may well be doing the same thing. So what steps should be taken to address cash management issues in the current crisis?
Asleep at the Wheel
Well,l some general planning rules apply – not least in terms of adapting to circumstances. “Whatever plan you had last month, if you have not adjusted it this month, you are asleep at the wheel,” Mullen says. And in the current climate financial stewardship and all the associated planning has to address the possibility of serious business contraction.
“What we are seeing with our companies is that they are preparing for no growth scenarios,” he says. Negative growth is also a possibility.
But Mullen stresses that the crisis shouldn’t be seen completely in terms of “downside.” There will be opportunities. He cites the example of Huel, a company that raised £20 million from Highland Europe last year to support the growth of its long-life nutrition business. It has an opportunity to grow orders in the current crisis. Indeed, a spokesperson for the company, who I contacted last week, said orders had already begun to rise.
The number of businesses that stand to actually benefit from the crisis is not insignificant. In the consumer market, home entertainment and fitness equipment is demand, with suppliers of books, electronic goods, gym equipment and bicycles reporting a rush in sales. Less obviously, advisory firm Chase de Vere reported a 72 percent rise in usage of fintech apps. Video conferencing tool suppliers are also expect to gain customers as working from home becomes the norm for the next few months at least.
The majority of businesses, however, are likely to experience a negative impact – hence the need here in the U.K. for a massive package of economic support, including loan guarantees, grants, part payment of salaries (when workers are furloughed) and help the self-employed. These are hard times.
Nevertheless, at a time when it is vital to talk not only to staff, but also to customers and other industry players, active engagement can help businesses prepare for the recovery. “Don’t forget to look for opportunities,” Mullen says. That could mean paving the way for orders from customers, but there could also be opportunities to build partnerships with other players in the industry at a time when everyone is seeking a route through the crisis.
No one should underestimate the potential impact of the Covid-19 pandemic on domestic economies and global trade. Indeed a recession is expected. Against this backdrop, the importance not only of planning but also good financial stewardship has been thrown into sharp relief.