Navigating COVID-19: Practical financial crisis guidance for social ventures
Growing and scaling a social venture is a daunting task as it is. Navigating a global pandemic is the ultimate challenge — but doing so successfully will mean your social venture will survive to continue reaching and improving lives at scale.
Rippleworks convened our portfolio of 100+ ventures on an invite-only call to share practical guidance and actionable tips from those who have direct experience managing and leading through financial crisis.
Andy Kaplan is a Rippleworks Expert who has led multi-billion dollar companies as the CFO of Time Life, Audible, Thomson Reuters, and DonorsChoose.org. Doug Galen is the CEO & Co-Founder of Rippleworks, and previously led three Silicon Valley startups to successful exits (Shopkick, Shutterfly, E-Loan), and scaled eight $500 million businesses within eBay.
Though both Andy and Doug have led companies through the highs of massive growth, IPOs, and successful acquisitions, they have had to navigate several crisis moments along the way, through two booms-and-busts, market downturns, fundraising crunches, and major layoffs.
Andy and Doug prepared practical steps social ventures can take to successfully survive financial crisis, pulling from their own personal experiences and tapping into the insights from Rippleworks’ network of executive experts, entrepreneurs, and funders.
The practical guidance covered six main topics:
- Working Capital: Squeezing cash from your business
- Scenario Planning: Revisiting P&L and cash flow
- Cutting costs: Reducing non-personnel, personnel expenses
- Layoffs: How to do them well
- New realities of raising capital
- Your role as leader
Below you’ll find a writeup from the call that hopefully will be practically useful as social ventures navigate the COVID-19 crisis. In addition, we have shared the slides and the transcript of the Q&A.
1. Squeezing cash: Working capital stack
All of us know that in today’s environment, cash is king. To get from survive to thrive, you need cash. If you run out of cash, you have zero options.
Let’s begin by drilling down into the working capital stack and squeeze as much cash out as we can. There are six main areas of opportunity:
- Cash on hand: How much and where?
- Short term cash-like investments: How much, where and how liquid?
- Lines of credit: Do you have them? Is it time to draw them down? Get the paperwork ready so that when you decide to draw them down there will be minimal friction in getting the funds.
- Accounts Receivable: Talk with people that owe you money. What can you do to accelerate their payments to you? Offer payment discounts if you must! Chances are other companies are calling them as well, so you want to get in there quickly when they’ve got the money to pay you.
- Accounts Payable: Call your vendors. Assertively but sensitively discuss pain-sharing arrangements that allow you to delay payments. Once again, in this area, the squeaky wheel gets the grease. Pick up the phone — don’t do it by text, don’t do it by email.
- Inventory: Look at ways to turn existing inventory into cash. What can be sold? How can you be creative. Look at outstanding purchase orders and make decisions on what to buy and what to cancel.
2. Scenario planning
After you’ve gone through your working capital stack, you’ll now know how much cash is available to run your business. Now, it’s time to take a fresh look into your P&L and cash flow with updated scenario planning.
The world has obviously changed dramatically since you made your 2020 P&L and cash flow budget six months ago. In fact, so much has changed that understanding how these changes will translate into revenue and cash flow is not simply an exercise for the financial team.
There are three important things to keep in mind as you do:
- Assumptions don’t have to be guesses. Work to gather as much information as you can, assess it, and decide what it means for your business. As you learn more, you can always update the assumptions that drive the financial model.
- If you look at this simply as a “budget revision” process, you will fail. It goes way, way deeper.
- Question everything, especially every expense
You’ll want to create P&Ls and cash flows for the rest of 2020 and all of 2021. This should give you a planning horizon that will reflect your view on when things will bottom out and when recovery will begin.
Create two versions as you do your scenario planning:
Version #1: What you expect to happen based upon what you see today
Version #2: Worst case scenario based on what you see today
As you do, here are practical lessons learned on how to do this well:
- Your models should be monthly. With this framework, you should be able to get a read on where you expect your cash balance to be at the end of each month.
- The most important variable is revenue. You can’t just wing it. You need to create your expected sales pipeline customer by customer, or guarantor by guarantor. For non-profits, the same holds for grants and contributions.
- Reimagine your revenue. What “old” ways of generating revenue will continue? What “new” ways of generating revenue can you develop?
- This is not a one-and-done process. You’ll should be updating these models at least twice a month until your confidence in trends lets you do it less frequently.
3. Reducing costs
Once you have a sense of where you are with your revenue, you can dive into your operating expenses. This is more than just a simple money-saving exercise — this is an effort to remake your cost structure so that you can first survive, and then thrive.
Your job is to turn over every part of your business to first find ways to cut non-personnel costs. You can’t cut even one person from payroll before you have done absolutely everything else required to bring down expenses.
So how do you start? Remember: Companies don’t spend money. People spend money.
- Have a real person review every invoice before payment. You will be amazed what you find when someone looking to save money is examining every penny going out the door.
- Look at direct debits automatically taking money from your bank account. Consider stopping them all, so you don’t bleed without knowing it. Then, nothing gets paid unless someone looks at it first.
- Have every team member that spends money sit with their manager to decide where to keep spending and where to stop spending.
Here are more actionable ideas that have helped reduce costs:
- Solicit NEW cost reduction ideas from every team. Fill up the page. Assess and act ASAP.
- Office rent costs are being looked at through a whole new lens. Talk to your landlord now about delaying AND reducing rent payments. Get on the phone and ask. Chances are they are really going after those who aren’t paying anything. So as long as you’re paying them something, you may be able to get their cooperation.
- Talk to your utility companies and any companies you are buying services from or leasing equipment from. Negotiate pain-sharing agreements with them.
You should only start considering personnel related costs AFTER you have done everything you can to cut all other operating expenses. And before you get to layoffs, get creative in finding ways to reduce personnel costs in other ways. There should be no shortage of ideas, but here are a handful to start:
- Cut exec compensation, first and most
- Salary reductions
- Job sharing
- Move to a shorter work week
- Revisit benefit plans
4. Layoffs, done right
Layoffs are every leader’s nightmare. Doing this poorly can have profoundly harmful effects on your business and culture. But doing this well can help give you a fighting chance at surviving, while preserving the culture and team that will take your social venture forward.
Andy Kaplan was at the helm of several company-wide layoffs, including at Audible and Time Life.
Andy reflected on his Audible experience: “Someone I reached out to for advice told me not to be afraid to cut deeper than you first think to, because you need to make sure you do it right the first time. He said the people that will remain will work harder and deliver better than ever before. And you know what? He was right. Our team delivered extraordinarily well.”
When deciding when to make layoffs, Andy’s advice distills into two important tenants:
- Take action sooner rather than later. Once it’s clear what needs to be done and the decisions are made, don’t wait to take action.
- You never, ever want to do layoffs more than once. Doing more than one round will be detrimental to your team morale, not to mention your soul. It’ll be better to cut too many than too few.
But, more than anything, layoffs is not just about the decision. Knowing how to perform layoffs well will be the difference between an open wound and a small scar for your company as you head into the future.
Andy shared his experiences on the call:
“I learned that if you have a layoff, it should leave a scar, not a wound. So what’s the difference?
When I was at Time Life, there was very little in the layoff process that we did right, and for years after, colleagues referred to it as the Saturday Night Massacre. Because we handled it so badly, the Saturday Night Massacre remained an ongoing open wound in the company.
For the Audible layoffs, it was a terrible day. It was a terrible week. But because of the process we went through before, during, and after the layoffs, it left only a small scar on what today is $1 billion+ business.”
So how do you do this so you only leave a small scar on your company, team, and culture?
Preparing for Layoffs: Be rooted in compassion
Doug Galen has been on both sides of layoffs, and his advice to leaders is that conducting layoffs starts and ends with compassion: “You’ve just been ruthless with cutting expenses. Now, you are dealing with people, and you need to switch from being ruthless to compassionate about everything you do with the people.”
As Doug shared his experiences with ventures on the call, he reflected on three actionable pieces of advice on how to prepare:
- There are three groups you need to be actively thinking about and caring for: Those leaving, those remaining, the leaders conducting the layoffs.
- Have the communication plan defined precisely. Choreograph the day to every detail, and script what you will say. Train managers to be empathetic, calm, and consistent, even if the impacted person isn’t.
- Minimize surprises. Start letting people know about the journey that you’re going on to reduce costs well before the actual layoffs.
- Make it as easy as possible for departing employees. Prepare the details to make it an easier experience: have paperwork completed, pre-determine final working days, next steps for returning supplies, etc.
Communicating Layoffs: How to do this well
The actual day, as Doug reflects, “is going to be one of the hardest days of your life.”
Doug shared two principles to anchor on as you make your way through layoffs:
- Remember your ‘Why’: You are making these gut-wrenching decisions to live another day to drive more impact
- People can usually handle the truth. What they can’t handle is feeling like you aren’t being honest with them, or not telling them the whole truth. Be honest, upfront, and transparent in everything you do.
A lot goes into communicating layoffs, but here were four main actionable pieces of advice for leaders:
- Do it swiftly (ideally all on the same day/week)
- Take care of people on the way out. Let them know that you and the team is here to help them with their next career steps as much as you can.
- Listen in the moment. Then, stick to the script. Sticking to the script will help you avoid saying things in the moment that only make you feel better that actually isn’t helpful to the person getting laid off.
- Ensure your team staying knows their jobs are safe. Assure people that all measures have been taken to avoid future rounds of layoffs.
Life after Layoffs
Success isn’t undergoing layoffs. Success is that the remaining team — and the remaining business — is in a position to survive and hopefully thrive going forward. Make sure your remaining team is in a good place coming out of what will be a difficult experience for them as well.
Have your managers ask their employees three questions:
- Is it clear why this happened?
- Is there anything we could have done better?
- Do you have any questions about our new plan?
The direct aftermath is critical. The remaining team will have a recovery period, and all eyes will be on you and the leadership.
- Be patient. People need some time to process. Studies show 20% decline in performance following a layoff.
- CEO should readdress what this means for the company, the new organization structure, the go-forward plan.
- Demonstrate you are more committed to the mission than ever. People will need inspiration.
- Be extremely visible — change your meeting cadence and show up in new/different meetings.
- Employees want more metrics and more information than ever before
- When things get better, try and go back and hire those first people you let go if at all possible. It’ll be amazing what it’ll do to morale.
5. New realities of raising capital
Those who have led companies during market downturns and widespread financial crisis know that the world of raising capital is fundamentally different.
Andy and Doug reflected on their days of trying to raising capital during the dot-com bust, and they brought in insights from Rippleworks partner investors and funders to share practical advice for raising capital:
- Focus on existing funders. All funders will be focused on the needs of their existing portfolio; there isn’t enough new money out there for you to go after.
- Only the best of the best will get funding. Know that it’s an uphill battle and you need to be able to make the clear argument of why you are deserving more than the rest.
- Closing is winning: Don’t lose a deal because of price.
- Ask for 18 month runway; take 12.
Doug reflected on harsh realities faced at E-Loan following a successful IPO in 1999.
“We went from nothing to public. We went public at $15 share price, then went to $75 on our opening day. A month later, we were back at $15. Two months later, we were at $2.
We were fighting for our life, and we had a choice to make, which is hold on to our ego, or take new money at a 70% discount. It was brutal, but we had to survive. We took the 70% discount and diluted the investors immensely. But we were able to live another day.
I don’t regret the decision for a second because survival is what we needed to do. I mentioned that we’ve got a tough year coming ahead. You’ll get an 18 month runway if you can. Take 12, but you have got to get well into 2021.”
Managing existing debt
- Be proactive. Go now, be first in, have discussions with anyone that you have existing debt. Propose new terms (New repayment plan, refinancing, principal payment deferral, etc). Think through everything you can ask for.
- Inform your lenders as soon as possible if tripping a covenant, which will help preserve goodwill.
- Anticipate debt providers want sacrifice from equity players
Grants & donations
- Grants from foundations: If there is money that is supposed to be coming that isn’t in yet, go out now and ask for it. Pull it forward, move commitments up. Go now, be the first in.
- Individuals and corporations: whoever your top donors have been, let them know how important this is, and make direct asks for commitments.
- Restricted cash: Go back to those who gave it to you, and renegotiate restrictions. See if you can get it to be unrestricted — maybe you can get 30% of the restricted money to become unrestricted. Maybe you can get them to advance overhead portions.
- Credit line: If you have one, you may have to pull it down. Be prepared to be aggressive in surviving what will be a one-year winter.
Communicating with investors & funders
- No spinning: be honest and transparent.
- Share a thoughtful breakdown of the impact of COVID19 on your business. Share revisions and scenarios with them. If you go to them and say everything’s going to be fine, they’re going to call bullshit and they are not going to believe you. Everyone is impacted by this, and funders want to know how you’re going to react to it. The quality of your planning and response is critical.
- Make specific asks. Investors will only be able to respond if you tell them exactly what you need and why.
- Go on overload in keeping your investors, funders, grantors connected and updated with what you’re going through. It’ll make the asks a lot easier.
6. Your role as a leader
For the executive leaders on the call, Andy and Doug shared five actions leaders need to be taking during times of crisis, stemming from their experiences and advice shared from conversations with other experienced leaders:
- Be first one in, last to leave, and available on weekends. Let them know and see how much you care about surviving, and how challenging this will be.
- Say: “This is about survival. It’s going to be difficult” (if it is). Don’t say: “Everything is going to be OK” (if it might not be).
- Offer hope. Bring back your mission, vision, and the new reality you’ll get to.
- Over engage. Send weekly notes. Ask your CFO / Controller to send weekly updates to your Board. Find ways to over-communicate.
- Maintain culture. Maintain existing stand-ups, 1x1 meetings, team traditions. Build ways for your team to connect remotely and maintain culture. Schedule drop-in coffees over Zoom. Keep lighter, sillier traditions alive. Remind your team to take vacation days. Celebrate victories. Demonstrate that you value your team members — especially now.
“And above all, this is the time to believe in yourself. Remember, you are the best person to do this — nobody else knows more about your business than you do,” Andy Kaplan said to close the call.
“During my career, in the darkest days — and there were many — believing in myself gave me the strength to keep moving forward. So to all of you out there I would say to believe in yourself. There’s nothing more powerful, and you’d be surprised how contagious it will be amongst your team.”