Startups should get some perspective, and how governments should support business in the age of COVID-19

Startups should get some perspective, and how governments should support business in the age of COVID-19

I’ve done too many Twitter threads by now to not write down some thoughts in a longer format.

It is a tough market to operate right now for businesses. Note that I didn’t say ‘startups’ or ‘technology companies’, it is tough for businesses. Pretty much all of them.

When everyone is pulling back on spend, everyone’s revenue goes down. That’s the reality of our babushka doll supply chains, and no matter if you’re a SaaS app or a bolt manufacturer, you’re in someone’s chain and you have your own.

I get the pain, I’m there

We’ve seen that in my own operating business. We have exposure to the tourism/travel and hospitality industries, whether directly or via marketing/ad agencies who service those sectors.

That means a huge spike within that segment in customers pausing subscriptions for a period or simply churning due to killing all subscriptions. We’re lucky that we have somewhat diversified revenue streams and these aren’t our only target market.

So while it’s painful, stressful and every day I carry the ‘depression’ of stuff not being all “up and to the right”, I can’t really complain compared to many other people’s stories of 50+% of revenue disappearing.

I’ve taken the opportunity to review expenses and trim down things that aren’t strictly necessary, whether it’s reducing the capacity of our staging environment or finally getting rid of that subscription that is stupidly impossible to cancel (I’m looking at you, media companies).

I’m asking vendors if they have programs to assist people affected. Some do, and I will become all the more loyal in thanks for them sharing the pain that we are, even to a small degree.

Others won’t, and I’ll likely replace them down the track if I can (looking at you, AWS).

The other lucky thing is being an indie business (see my long rant about startups vs smallbiz vs indie vs lifestyle here) that has (some degree of) profitability, so we didn’t have a fixed runway we had to raise money by before all this happened.

That doesn’t make us any less immune to market conditions than any other small business, but that to a degree I can see both the lenses of “traditional tech startups” and “traditional small businesses”.

Handling uncertainty as a founder or business owner

It sucks to be a business owner or founder right now.

You want to help employees, and give them as much cash as you can. But you also may not actually have cash to pay them, or you have less cash (runway) than you had 6 weeks ago.

This falls on you. For some reason, a lot of the public and media seem to think founders/business owners sit on piles of money and should just burn cash to support employees out of some kind of moral obligation.

It will not be news to most in that camp that no, that is not the case.

It’s strange to me that people simultaneously talk about how ludicrous it is that landlords are concerned about tenants paying their rent, which is essentially the landlord’s income1Don’t get me wrong, the whole “oh yeah you should go pull money out of your superannuation so I don’t have to do a rent reduction” is ludicrous. – yet simultaneously demand that small businesses (who are essentially themselves on Newstart at this point) pay the full income of their staff when they have no revenue coming in the door.

If you don’t have money, you can’t pay for anything. Cashflow 101, for both parties.

Everyone needs to come to the table to help those in trouble, whether they’re a business, a landlord or an employee. Contrary to Tech Twitter, a universal basic income isn’t the solution, and even if it was, it’s not appearing overnight.

Almost nobody is having fun right now.

I’ve spent a lot of time in the last few weeks talking to founders and business owners. Some are tech companies, others run cleaning businesses or gyms.

Almost nobody is doing well. Everyone is stressed and anxious, and wants to avoid layoffs or do what they can to support teams during this time.

Uncertainty is the thing that takes the biggest toll on a founder/business owner. You don’t know what the right answer is: do you lay people off? Stand them down? Dip into savings or retained earnings and have a few months of negative cashflow?

When will things recover?

There isn’t a right answer until you are after the fact. Now is the time to think about who you have in your camp, and are they inspirers, mentors, comiserators or idiots.

If you want someone to Zoom and comiserate or shoot the shit with, feel free to slide into my DMs. I don’t have answers but I do have experience feeling what you’re feeling.

No, [tech] startups, you are NOT special

Startups have this awful habit of crying wolf every time something happens that might impact their work.

I get it. People aren’t buying your stuff. That sucks! I 100% know the feeling of that.

Why aren’t they buying? Because they don’t have any money, or they’ve just laid off the team who would be in charge of implementing your solution (or changing vendor). Or they just don’t need more change in their lives right now.

But you’re not special. Your business model is high risk/high reward. That means you take risks – one of them is that you will be able to get through to the next stage on the runway that you currently have.

Sometimes things happen that shift your operating environment. Maybe it’s a big well-funded competitor jumping into your market. Maybe it’s a change in whether your industry is ‘trendy’ or not. Maybe it’s an event like the GFC.

Maybe it’s a big pandemic.

That’s business. Things change.

Your runway has been cut in half because people have stopped buying or customers are churning/pausing/cancelling/extending POCs. That sucks, and I’m sorry, change hurts.

You know what? You’re still in a better position than the tourism operator that now has literally no revenue or way to get any because people can’t travel, and is instead experiencing a ton of people demanding refunds for force majeure.

This morning I was on a webinar with a tourism operator whose business is seasonal (whale shark tours), and this has happened in peak season. They’re not expecting business to return to something representing normal for 18 months.

Or a local bar who suddenly literally cannot trade – but still has to try and make payments to staff, landlords and more.

Or any business that carries a ton of PP&E2Property, plant and equipment – think “physical stuff”. Classic finance is that this is things like cars/trucks/vans etc. owned (or financed) by the business for it to operate. that’s financed with security over their primary residence, which can’t be put to work.

You’re suddenly losing more money than you were losing before, and you might have to go back to your investors to get some bridge financing. That might involve a haircut! Hopefully it will be in 30 minutes or less.

The way that some tech startups are talking right now is actually shameful. You are not as heavily affected – that is not to say you aren’t at all, but I think many need to get a bit of perspective of what others are experiencing before they open their mouth and cry poor.

It is not the government’s job to prop up startup valuations.

If small business loans start being called by banks (luckily this is unlikely, but let’s add some context here), a lot of business owners will lose their home.

For almost all startup founders, this is not the case – you’re not mortgaging property or getting residentially secured loans for their opex. Stop complaining that you might see your valuation get cut if you are forced to go and raise some money.

If VCs are honest, they’ll say that there aren’t any problems for a good company to raise. They still have dry powder (money).

The average or (honestly speaking) bad companies might not be able to. If for whatever reason you fall into those categories, it’s time to pivot (perhaps to profitability, a new product), reduce expenses (salary reductions, shift to part time, layoffs), or frankly, it may be time to call it a day.

It sucks every time a startup fails. The fact that COVID-19 has changed your operating environment may well be the impetus for some companies with less stable foundations to fail faster than they would have otherwise.

We should see more startups failing over this period, as we’ve been in a period flush with cash in the last few years, and now the pendulum is swinging back the other way. Bad businesses may well fail, and that is not a bad thing, although it does suck.

Failure isn’t a bad thing – it is the business model of a startup. When you’re playing a high risk/high reward game, sometimes it blows up in a bad way.

What governments should do

Okay so I’ve ranted about silly things that are going on, but we also need some solutions.

I’m looking at this from the business perspective not employee or member of the public – so I’m not excluding those lenses at all, but others are more qualified to discuss them and how government is/can/should support them.

Provide directed support for cashflow in the short term (8-12 weeks)

Assuming that the business itself is otherwise fine but has been directly impacted by COVID-19 (such as a cafe, bar, tourism business), the immediate short term issue is cashflow due to revenue drying up.

This means support around standard levers of cashflow:

  • [Available] For better or worse, a lot of businesses use the ATO as a bank. Deferring BAS payments and offering payment plans easily means that businesses can focus on paying employees and suppliers over the ATO (which they already did, let’s be honest).
  • [Available] Direct payments to reduce the net ‘cashflow cost’ of employees. This should be tied to how much you pay an employee to encourage businesses to only reduce wages or headcount if necessary. The downside of the current model is the delay between BAS filing and the ATO credit, but it does reduce the ATO obligation either way. The proposed JobKeeper payments apply here as well.
  • Accounts receivable: provide incentives for large corporates to pay small businesses in a shorter period (such as within 7 days of an invoice). The 90 day trading terms often forced on smaller businesses have a huge impact on cashflow. I’m not sure how this could be implemented (perhaps as a tax credit for the corporate?).
  • Credit cards and loans: banks have announced support and hardship programs already, and hopefully they’ll be doing that seriously. A good policy angle here would be ensuring that loan deferments or agreed-in-advance card payment deferments do not negatively impact credit ratings.
  • Rent/Leases: clearly some policy is being set here currently (3 Apr) which is good. The risk should be somewhat shared, and proposals for the rent to be proportional to the impact a business has experienced is a good thing.

In my opinion, these shouldn’t be limited to those who have seen some kind of criteria, or that criteria should be very broad. This weird 30% rule that’s been bandied around for JobKeeper is silly. Any criteria will be rorted by some and end up excluding others who should receive it.

Tying these benefits to some kind of bona fide declaration from the owner and/or accountant that the business has seen a negative impact as a result of COVID-19 is I think sufficient.

These should be easy to access but not huge. It is OK for it to be a bit of work to get ‘free money’ from the government.

Make it easy to access loan-based capital

Loans are great. They involve shared risk and I think are much better than ‘government bailouts’.

Non-recourse or government-guaranteed loans to encourage employment

I really like the PPP program (“CARES Act”) model that the US is using. It uses existing infrastructure (the SBA loan scheme) and has clear criteria. There is criticism about how they are handling the includsion/exclusion criteria so it is not perfect.

In this model, businesses can access loans to pay for:

  • Payroll, and
  • Other costs like rent, interest and utilities (with a cap of 25% of the loan at most to go to these elements)

Over an 8 week period.

There is a cap on the per-employee payment ($100k pa). Loan payments are deferred for 6 months, and the loan is forgiven entirely if employment and compensation levels are maintained.

That is to say, you are directly incentivising businesses to keep people employed at their current rates.

There is still some effort needed to apply and get the loan, which will be annoying and no doubt problematic for some, but this way the amount of stimulus can be much higher and tied to the same kind of criteria a bank would use for a loan (such as revenue).

Alternatively, run it as a non-recourse based loan, where the loan will be forgiven if the business is shut down or declared insolvent, but otherwise the business will need to eventually pay it back.

This might also include a 12 month payment deferment and/or low/subsidised interest rates, or even a percentage of it being forgiven.

I do not have problems for business owners to need to take some risk and accountability here. The government has announced half-government-guaranteed loans, which is part of the way there but still can put the owner on a pretty sharp hook. It’s still better than nothing.

Low interest loans for capital improvements

We have already seen an increase to the amount that businesses can write off immediately for capital expenditure, but businesses need the money to pay for them.

‘Now’ (once heavy restrictions are slowed, so not “today”) is a great time to refit a restaurant or perform capital works if you are trading at a lower volume than normal.

It would be great to see it encouraged through low interest loans for businesses to access low interest loans to perform these works that were probably in the “one day I’ll do it” bucket.

Any capital works will boost other businesses (often also small business) in the supply chain.

Encourage Australian businesses to buy from other Australian businesses.

There are lots of reasons for Australian businesses to buy locally – at a simple level, the USD is for whatever reason pretty expensive right now, so anything you buy in USD is more expensive than it was.

Support to encourage local sourcing might for example be through a rebate of GST paid on items by businesses (you need to report this to the ATO anyway).

This would also include anyone registered for GST (contractor, sole trader, …) and so would also encourage businesses to purchase services locally as well.

Don’t try and pick winning or losing sectors

Whatever we do, government should avoid picking winning or losing sectors. Every part of the supply chain is affected, and while some are very clearly more heavily impacted by policy changes (travel/hospitality), it’s hard to ‘get it right’ so stimulus goes to those who need it.

I’m not a fan of the announcements of government ‘bailouts’ for airlines or other measures heavily targeted to support only a single industry.

This is king-making certain sectors, and while I agree that Australia needs an airline after all of this, airlines notoriously operate in a boom-and-bust environment and their shareholders (which include my superannuation!) should take some of the hit.

This counts for startups too.

Don’t incentivise negative behaviours by treating the R&D Tax Incentive differently

Calls for the R&D Tax Incentive (RDTI) to be paid early are ludicrous, and suggest that you should only get support3Yes I am absolutely using hyperbole here, and software engineers are not the only category of people who do R&D. if you hire a lot of software engineers, because their salaries alone deserve to be subsidised by government and “bailed out” because … ??

If the aim is for government to support businesses who are finding it hard to make payroll, then use levers for that.

The RDTI is not a lever for cashflow, and any kind of additional payment for it is only going to encourage people to start claiming (/claim even more) that they’ve been doing highly innovative work building artisanal WordPress themes using Webpack that they’ve rebuilt in Go for no reason beyond ‘I wanted to play with Go’ as a build process4Non-nerds: this is just to say dumb stuff that is clearly not research or development..

We have had problems recently about startups claiming this kind of extremely clearly not R&D (as defined in the legislation) as eligible expenditure, when it is not.

You can argue as much as you want about how much of software development is pure research (I’d say not a lot), but the legislation is (I would say) clear and it is absolutely not agile.

Sure, maybe we need to expand it or change/modify/improve the definitions – however that is not a short term problem, and we are looking for short term solutions not longer-term reforms right now.

If startups are really THAT desperate to get their RDTI early, there are already mechanisms that they can go to get early financed payments of the RDTI before it is paid. There are effectively specialist lenders in this area, so let them go get loans.

VCs and investors should share this pain too – they have invested in this high risk venture, and they need to decide whether to support it, or let it die and their investment is written off. Investors can write the con note to help the company live through the period or tell the company to pivot with its last runway.

Encourage right-sizing, and … failure

OK so I’m leaving what I think will be most controverisal for last.

We need to encourage right sizing. There are some (many?) startups that are not right sized.

Most startups aim to hire the number of people they need for the growth/size of the business in 12 months’ time. They have hired a ton of people for growth that suddenly may not eventuate due to a big change in operating conditions.

That will mean people lose jobs. That sucks. Hopefully there will be others looking for new people! This is also where systems should be in place to ensure that those who do lose their jobs as a result aren’t suddenly destitute.

The worst thing we can do right now is end up spending our resources (money/effort) putting brain dead startups on life support. Let them be organ donors to the next generation of businesses.

Encourage new business formation from the rubble

I would rather see a program where new businesses established by employees laid off from a previous business (in some capacity) are effectively given seed money from the government (likely indirectly – e.g. something like the JobKeeper payments guaranteed for 9 months for the cofounding team) to start a new venture.

We would see a huge increase in new innovative businesses, and likely before that 9 months is up, a lot would become revenue positive in some way, raise capital and hire employees, or who knows.

It’d be the universal basic income Tech Twitter has always wanted, but time limited, not at a rate that is outrageous to discourage rorting, and encouraging new enterprise.

Of course, the devil here is in the detail – I’m not suggesting I have all the answers, but this way we encourage new businesses to start and thrive, rather than propping up zombies.

Some will ultimately fail, and that’s fine! After all, that’s what it means to take a high risk/high reward bet.

Notes   [ + ]

1. Don’t get me wrong, the whole “oh yeah you should go pull money out of your superannuation so I don’t have to do a rent reduction” is ludicrous.
2. Property, plant and equipment – think “physical stuff”. Classic finance is that this is things like cars/trucks/vans etc. owned (or financed) by the business for it to operate.
3. Yes I am absolutely using hyperbole here, and software engineers are not the only category of people who do R&D.
4. Non-nerds: this is just to say dumb stuff that is clearly not research or development.

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