Webinar on COVID-19 | Decision Making under Extreme Uncertainty
A full transcript of the recent webinar we held with our portfolio companies, hosted by CHUA Kee Lock (CEO, Vertex Holdings | Managing Partner, Vertex Ventures SEA & India).
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At Vertex, we have been communicating very regularly to our people even before COVID-19 was declared a pandemic. Singapore has also been lauded for its stringent management at a time as this health crisis reverberated worldwide.
Yet, we continue to be very concerned with the current state of affairs. Regular, effective communications with employees is especially important in challenging times. This is something that all of you should take seriously. If there is a lack of communication and you are unable to allay your employees’ concerns, what starts off as fear can become a panic very quickly.
Business Continuity Planning
For the business, what we need to do is take action now. The first thing is to ask yourselves – “How do we have business continuity in a crisis?” And the question can be a very simple, intuitive one. If someone gets infected in your company, how do you ensure that it is business as usual for your customers and clientele? You must be aware of this because in many parts of the world, countries are in lock down or beginning to do so and in some cases with enforced quarantine of 14 days. If somebody is infected in your company, the whole group may be quarantined.
In Singapore, quarantines are taken very seriously. You will be closely monitored - at least twice a day to make sure you are at home. This may be via video or other means and you literally cannot go out. Therefore, if your entire team is based in one location and a single colleague is infected, the whole group will have to be quarantined. This is something you need to consider. This may mean socially distancing your colleagues to prevent placing your entire team at risk.
Depending on where you are, do you need to work from home or have separate office venues? I think working from home may not be viable for some roles. For instance, you cannot tell the receptionist to work from home, right? That does not make sense. So, you need to figure out what is the sensible way for managing optimal social distance in your team. Do you need to have spilt team arrangements? Do you need to have split teams on different floors coupled with lift segregation protocols? Do you need to consider other alternative work arrangements? This is certainly something you will need to look at. And most importantly, you need to screen and regulate visitors coming to your office as they may also be potential carriers and this is something you need to think about. How do you make sure that your visitor management policy is clearly understood by all and applicable? Visitors who declare that they are coming back from affected areas, should you offer them the option of conducting meetings by video conferencing instead?
Measures to Address Reduced Demand
Demand will be down as we mentioned. You need to analyse your customers and revenue. The reduction may not necessarily be across the board. Certain customers may still be spending. You have to parse the data. I will give you an example. When I was at a leading steel maker during the SARS period in 2003, demand generally fell but our pre-fabricated steel (“pre-fab”) business was actually growing substantially. This was because during SARS, certain construction sites needed to continue despite the significant decline in the number of workers. So, a lot of people chose to buy pre-fab. During that period of time everything was down except for pre-fab and hence, the business was growing like crazy. Fortunately, we took note of that. We re-organised and focused our resources on those areas that would generate revenue within that short time. In fact, that was one of our success stories during the SARS period.
When demand is down, you need to quickly review your business and revenue in detail. Don’t generalise. There are certain businesses that may not necessarily go down. You have to ask yourself if this business segment is not going down, is there a way for you to reallocate your resources to ensure that the right resources are deployed in the right places.
Review Cash Runway and Burn Rate
Now, what are the specific next steps? We think there are a couple of things you need to consider. You need to quickly review your cash runway. Each of you may have very different cash balances. You need to look at your cash runway, your burn rate in terms of the amount of cash left. Some of you may realize that you will need to reduce cost and expenses.
Some of you have sent your questions beforehand and asked whether or not it makes sense to “reduce staff” or “reduce salaries”. In the past, speaking from experience during the SARS period, our company decided to “reduce salaries” instead of reducing headcount. And the reason for that was because there were certain skillsets in our company we fundamentally needed. If we were to lose these staff, should the situation improve 12 months later, we might not be able to get the same people anymore.
Hence, we chose to go with salary reductions across the board. Senior management led with 20% pay cut, middle management took 10% and the rest between 5-7%. That substantially availed enough savings for us to tide through those trying times. Of course, we also implemented pay and hiring freeze and everything else as well.
In case your business has certain skillsets that may not necessarily be difficult to replace, you may choose to lay off instead. But if you choose to do so, you need to be aware of a few things. The management and/or founders should take the lead to cut their salary first. If you lay off while keeping the management and/or founders’ salary the same, you will lose the moral high ground. That is an observation based on my experience. People are reading your actions so this is something you need to be aware of, especially the actions you have taken while not taking any sacrifices personally.
Reduce Cost and Eliminate Unnecessary Expenditures
A very important thing to note when you are conducting a lay off, reducing expenses, taking pay cut or whatever you deem necessary, is that you must ensure you do it only once. You need to look at your forecast, all the way until at least December, as this pandemic is likely to be protracted. Whether is it reduction in salaries or staff. You must do it only once.
To conduct it over several steps (e.g. cut 5% now and 5% later) is the worst thing to do. Because this is a “death by a thousand cuts”. The morale will be completely lost. So, this is something you should never do. You should assess what you need thoughtfully and cut decisively (one time) and that’s it. It may be a deeper cut than you are comfortable with, but at least it reduces the risk of demoralizing your team the way multiple cuts will exact on them psychologically. If you have to make the cut, make sure that you do it only once.
Clearly, you may need to implement a hiring freeze, redeploy your headcount to growth areas as well as delay unnecessary capital expenditure and expenses. This is a very important point. Because as a start-up, you always look at things positively but you need to be aware that this COVID-19 situation is going to last for at least 9 months, perhaps longer. Some of the capital expenditure and expenses are unnecessary. You need to delay such expenditure as long as practicable.
One of you asked about cash. Generally, I would discourage start-ups from putting money in public equities or funds. This is something that you should never do. Cash is king for start-ups. You should always keep your cash in the most liquid form because you never know when you will need the money. In fact, start-ups should not even bother to place money in fixed deposits because the shortest meaningful duration is typically about 30 days and it comes with very marginal interest. During these challenging times, there is no point earning 0.1% more in interest per annum. This will not move the needle for your business. Hence, you should try to keep your cash as liquid as possible to avail the optionality of swiftly deploying capital whenever necessary.
Funding
Now the third important point is funding. Fundraising is going to be very challenging in this environment. Some of you may not have plans for raising funds. If you are planning to raise money in the next 6 months, I will tell you that this is something that will be very challenging. In the next 6 months, you may not find anyone who would spend time to look at new deals or travel around to conduct due diligence. Therefore, if you need to raise money in the next 6 months, you may need to find other methods. You need to figure out how to stretch your cash as far as possible until at least June 2021. This is something I have been telling our companies. In fact, I think some of you may have already received the note from Ben or Joo Hock. The reason is very simple. We are of the opinion that things are not going back to normal until the later part of the year, at the earliest. If you need to raise money, you can only start at that point in time. As the financing will take about 6 months to close, you need your cash to last until June 2021, at the minimum.
Now, some of you are in the middle of closing the financing process and hopefully you already have the requisite documentation. There’s a saying – “he who holds the gold makes the rules”. Investors may recognise this as the opportunity for them. They may tend to negotiate a better deal at this point in time. My suggestion for you is to be practical about it. It’s better to have cash to build the business than none and lose everything. This is something you must be aware of. You need to be flexible and do the necessary to close the financing.
Leadership
Employees are looking for leadership. I think your staff may have their concerns on the COVID-19 situation as there are a lot of unknown unknowns out there. People are panicking. You need to communicate regularly and give them confidence that their managerial leaders are on top of things, that you are taking steps to protect them and the business. The safety of your employees is paramount.
For Vertex, we have a Business Continuity Planning (BCP) Group that communicates with our employees worldwide in a timely fashion, providing key updates and guidance that includes travel alerts, visitor management and self-quarantine policies, workplace hygiene etc. Basically, we want our employees to know that their safety, health and wellness matters to us. Furthermore, we provide masks and hand sanitizers for all staff. We also have risk-based, self-quarantine protocols. In some cases, employees are also encouraged to work from home if they are unwell.
Some of us have lived through SARS but I think this COVID-19 situation is going to be even more challenging, very possibly also for much longer. Nevertheless, we have to take the necessary actions immediately, stay positive and communicate to employees to help them understand our position and what we are trying to do. This inspires trust, builds confidence, ensures solidarity and support as we navigate these uncharted waters.
Finally, we believe that healthy and vibrant communities are essential to innovation ecosystems, our societies and economies. In Singapore, our leaders at Vertex Holdings, Partners at Vertex Ventures Southeast Asia & India and Vertex Growth Fund, have all voluntarily opted for a pay cut to raise funds for two not-for-profit organizations that help families adversely impacted by COVID-19.
Assistance will be in the form of immediate financial assistance to address interim loss of employment, possible illness in the family or the procurement of daily necessities and groceries for needy families where a member is under quarantine. We have also provisioned some funds to either support these two not-for-profit organizations and/or other Public Health (Infectious Diseases) emergencies in future.
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Q&A
Here’s the exchange and sharing between Mr CHUA Kee Lock (CKL) and various Vertex Portfolio Company founders (VPC):
VPC 1: We work from home and implemented something like what you have done (e.g. split teams) but we have finite space. What we did was have people use private transport instead of public transport to commute to work, so that they are not exposed during the travel. We also space them 10m apart from each other. This system allows only 20% of our staff to work in the office and the rest work from home. And as you know in India, public transport becomes extremely congested and the risk of getting infected en route to the office is higher than contracting it in office.
CKL: This makes sense. I think this is a good hybrid model of working from home, adapting to constraints and risks.
VPC 2: We are seeing an opportunity in terms of the situation and how we could potentially capitalise and go on offence instead of defence. But the challenge we are trying to balance out here is of course, no opportunity is without risk. And so, at the same time, we are prepping our models (including financial models) around the strategy of defence, if we don’t hit a certain number of dollars by a certain time, we will implement specific cuts. How are you thinking about the companies you have seen in the past who have successfully capitalise on the opportunities in these downturns and how do they balance out their own risks management when they try to come on offence in this time?
CKL: This is a good question. In fact, I have been thinking of examples where people take advantage of the last crisis during SARS. In the case where everybody is down - even your business and customers are down, that will definitely delay spending.
If you are in a business which is capital intensive in nature, your affected customers delaying spending means that they will push back to sometime later. The fact you go on the offence and offer them a better price may not really change their behaviour.
Of course, somebody also asked if this is the time to negotiate on marketing costs. I think this is something everybody should do. Similarly, I am uncertain whether your customers will respond in the manner you desire if you were to go on the offence to encourage spending since, they are already restraining expenditures. Because I think they are affected and all of them are trying to survive for a longer time.
VPC 3: Why would it be difficult times for fund raising if VC funds are already committed? Do you think some LPs will not deliver on their VC fund commitments due to COVID-19?
CKL: No. LPs cannot get out of the fund once they have committed. What I am saying is that the PE and VC guys who have the money, they know that this is the opportunity for them. They know the good companies which are trying to raise money. Instead of asking for 2x revenue multiple, investors keen on these companies can come in at a 1.5x revenue multiple because start-ups know that there are no other alternatives. VCs that have funding support from LPs, are in a good position.
Sure, they still need to deploy capital. Instead of agreeing on a valuation of USD 50M, maybe they will agree on USD 30M because they know the companies need their money. The typical valuation is essentially half of what start-ups usually can get. But this is the time you have to be practical. If your business is good, you are in a business where people are willing to invest, then it is better to raise the money at a lower valuation first and move forward to grow your business.
VPC 4: Can you share any experience during the SARS period as to what happened in the F&B and food-related industries?
CKL: Similar to the current situation, a lot went out of business overnight. SARS only lasted for 6 months. A lot of people do not visit restaurants. Tourism suffered during the 6 months. Businesses that required human-to-human contact during that period of time were adversely impacted. Coronavirus is unlike SARS. It is highly contagious and worst of all, one can be asymptomatic. A lot of people are expecting this to go on for at least until end of the year.
VPC 5: How do you know how much to cut? In the case for our business, we do not see as much impact right now. But we do not know how things will be in 3 months, 6 months, 9 months. So how do I know how much I should really go into aggressive cost cutting mode vs being more conservative?
CKL: That is a great question. I think you need to look at your business from a revenue point of view. Today, you may not see it so fundamentally. You will need to start figuring out some of your key customers. Perhaps you offer an essential product. There are people who will still buy such essential products irrespective of the situation. So maybe your top line will not drop as much, if at all.
One of the things to assess is whether or not this situation will affect you. If it does not, first thing is to freeze pay and cease any new hiring for now. Then monitor the situation for one more month. If it continues to be the case, then you are in a very unique situation as compared to everybody else.
Everyone of us probably should have seen about at least 10-15% drop in revenue already and that is probably going to be the case for a while. That will be the start where your cost cutting will have to happen. Nevertheless, you should analyse your revenue and business in detail and figure out if this situation of invariant revenue is realistic or not.
In Closing
This is not an easy time. I am sure all of you will be able to handle it somehow and ride through it. The important thing to bear in mind is that your employees are looking for leadership. You will need to communicate openly. Be clear about what you are trying to do and why. If you need to make reductions in headcount – consider carefully, do it decisively, do it once and only once. Analyse your business. Figure out which parts of your business is shrinking and identify growth areas to meaningfully redeploy resources. And hopefully none of you is raising money now. If you are raising money, then it is going to be challenging in this difficult time. If so, be flexible when closing the round.
With that, thank you very much for joining the call. Good luck and all the best.
Note: Transcript edited for readability