Covid-19: The Case for Contingency Planning

The original article on The Case for Contingency Planning, posted on March 7, 2020, has been split into the Covid-19 virus (Coronavirus) information as of March 7, 2020 (here) and The Case for Contingency Planning (this post).  This post retains the discussion of the case for contingency planning, and the discussion of and links to information on the potential impacts on early stage venture financing.

 

The Covid-19 virus (Coronavirus) has arrived in many countries around the world, the US included.  The economic result may be a reduction in economic activity, with staff, business flow and supply chain challenges impacting many organizations to varying degrees.  Businesses and other organizations should be assessing their exposure, specific challenges, and action steps they can take.  The Covid-19 virus may be a survival threat for startup and early stage companies, including Insurtechs, trying to get traction or ramp up sales.  The ability to raise capital at a favorable valuations, or at any valuation, may be significantly impacted.

How each management team views and reacts to the Covid-19 virus exposure may dictate their organization’s prospects in the future.  Startups and early stage companies, and other organizations, should assess their business prospects in light of this new exposure, plan for change, and take action early in the process. It is particularly important for thinly capitalized organizations such as startups and early stage companies that may need to raise capital.

How to Think About Contingency Planning

In a letter titled Coronavirus: The Black Swan of 2020, Sequoia Capital provides excellent advice for startups, early stage companies and other organizations on how to think about the Covid-19 virus exposure (see here).  The message of thinking strategically and quickly apply to any organization.  Some key points are noted below, but reading the entire letter is worthwhile, even important, for anyone responsible for a team or a company.

  • Challenges many managers are facing include a drop in business activity, supply chain disruptions, and curtailment of travel and meetings.
  • In downturns, revenue and cash levels always fall faster than expenses.
  • Question every assumption about your business:  cash, fundraising, sales forecasts, marketing, headcount and capital spending.
  • Nobody ever regrets making fast and decisive adjustments to changing circumstances.
  • False optimism can easily lead you astray and prevent you from making contingency plans or taking bold action.
  • Could you turn a challenging situation into an opportunity to set yourself up for enduring success?…A distinctive feature of enduring companies is the way their leaders react to moments like these.

The last point is particularly important since your team, customers and vendors will be looking at you, the founder(s)/CEO/team leader, for leadership, direction, protection and support through a difficult changing environment.

How to Take Action

McKinsey has an excellent article on how to think about contingency planning (see here) which can be used to guide the planning process.  The article suggests applying three scenarios to your business: quick recovery, global slowdown and pessimistic scenarios.  It also suggests seven actions a business can take:

  • Protecting your employees
  • Setting up a cross functional response team
  • Ensure that liquidity is sufficient
  • Stabilize the supply chain
  • Stay close to your customers
  • Practice the plan
  • Demonstrate purpose

Capital Raising

At the beginning of the article we suggested that one outcome could be a significantly more difficult capital raising environment, which could threaten startups and early stage companies (not to mention other organizations).

What could a capital raise environment look like, and how might you adjust?  Mark Suster of Upfront Ventures has posted a presentation on this subject (see here), which is highly informative.

  • Valuation could take a downturn, and capital could become difficult to access
  • Social distancing will impact certain sectors (some more than others)
  • Running out of cash is a risk – plan accordingly
  • History rewards the early and decisive actions

A few key quotes:

  • While nobody knows for sure what will happen, I think the coronavirus is more likely to be seen as a Black Swan event (like 9/11) where the world will be very different as a result.
  • If its not a Black Swan event the worst case scenario is you were overly conservative.
  • It takes longer to reset private valuations and those who don’t realize the change may struggle to get funded.
  • So your job [as founder/CEO/team leader] is to stay funded past the initial phase of portfolio triage and uncertainty.

The situation is moving fast.  However, the concepts and suggestions from Sequoia, McKinsey, and Upfront Ventures apply throughout, at least until it is too late to take action.

Innovate Insurance – Innovation & Entrepreneurship in Insurance

 

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