Keeping your business recession ready

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Draw a line in time and start separating the world you thought you knew to a “pre” and “post” Covid-19. Kind of like the first episode of Attack on Titan, when wall Rose fell. The world would never be the same again. In all seriousness, I need to stop trying to make light of what’s going around in the world right now. But, as terrifying as things are I think that analogy is quite fitting.

Attack on Titan, is an anime that revolves around the city of Shigansha. A peaceful district protected against the evils of the outside world by the impenetrable wall Maria. The citizens of this town lived their lives engaging in commerce, educating their young and following their respective faiths. No one thought too much of it, everything was okay. Until it wasn’t. One fateful day, a Titan so large stood against the wall, breaking into the city and society started crumbling down. People understood that everything they once knew, their way of life was changing forever. You can no longer expect the walls to protect you, your priorities change it’s now about staying alive. I won’t spoil the entire show for you, but I find it fascinating how incredibly close we to that “dystopian” esque sociatey where the “scouts” have essentially become our medical workers.

Scene from Attack on Titan (Shinjeki-no-kyojin)


I’m not saying that things will change forever and we’ll never see daylight, but our behaviors, businesses and priorities will. During the time this blog is being written Covid-19 has taken away 30,000 lives while infecting 600,000 more. We don’t really see any end in sight.

The virus is spreading at a rapid pace and the only country that has managed to get through its grips is China. They’ve managed to do this through one of the most primitive, yet disciplined measures of pandemic prevention, social distancing. Now, it’s debatable whether the information being presented by the Chinese government is accurate, but let’s just say it is.

I’m not here to talk about the effects of Covid-19 or how you can mitigate it, just trying to understand the underlying effects to the economy. I’m no economist, I just enjoy free enterprise. This blog is an homage to capitalism as I have often found myself on the side that’s not too cruel.

I live in the island nation of Sri Lanka, a small island south of India. We’ve put some pretty drastic measures in place to reduce the spread of Covid-19 from travel restrictions to curfews. We’re currently on day 14 of lockdown (I think?) with nothing but essential services running.

What does this mean for startups, investments and businesses?

Adam Newman, WeWork Founder

Before I preach my sermon, here’s where I’m at right now. Five years ago, I founded a digital media agency which eventually grew to the point of sufficiency. That gave me the option to play around with a few things and a few little side projects which later on became this blog. We have about 10 businesses that operate predominantly in Sri Lanka. The commonality across these ventures are that they are light on capital and leverage technology.

I’ve just spent a good week on the phone (we obviously can’t meet) to figure out how to manage this economic shit-show. It’s safe to say that I’ve lost about a million dollars in valuation across the businesses, being conservative. This isn’t hedgefund money, but I’d probably enjoy sitting on that in cash right about now but who really cares about valuations anyway. I’m being sarcastic, every private equity investor is most likely losing their shit right now, which in all honesty is the problem.

I’ve written about this before, but funds that raise insane amounts of capital to markup value only to raise more money and do it again and again really bother me. There’s no realization of this “value”, it’s there and it disappears while the people managing the fund take home hefty cheques. I digress.

But this is a good thing right? For any business that creates anything of value, Covid-19 will be the great equalizer of our time.

Over the next 3-6 months (assuming that we can get the pandemic under control) we’ll start seeing the effects of a recession play out. The S&P 500 has already slid together with most global indexes. It’s not a pretty sight out there, it’s partly a correction of the market with an emotional catalyst. It’s shrinking and it’s going to hurt everyone (Unless you’re short-selling Zoom, or shorting something so good job you).

“A recession is a phenomena of business decline, failure, and less business and economic activity.

Its characteristics include a contraction of (real and nominal) GDP, higher unemployment and layoffs, lower profits (or losses), lower revenue, less consumer spending, low consumer sentiment, etc. “

It’s easy to read about these things, it’s a much harder pill to swallow when you see these things play out. The US had over 3 million people filing for unemployment benefits last year alone. If you don’t think that has a ripple effect on you, you’re wildly mistaken.

1. How well are you positioned to handle an economic downturn?

If you currently have a job that you enjoy doing that can be done from home, consider yourself one of the lucky ones. After having multiple conversations with friends and other business owners about pay cuts and layoffs I really just want to go hug my team.

It may take a decade or two and a lot of stimulation, but recessions (much like pandemics) eventually pass. The problem though is that if you get gutted along the way. I’d like to think there’s an easy way out of this disaster but I don’t really thing there is.

The reason that I started with the emphasis on personal debt, cash and survivability above all else, is that if you don’t have a clear head or a mechanism to fight this on your own, doing it for your organization honestly is an uphill battle.

2. Are you actually profitable?

I’ve always thought that there was too much hype around the startup ecosystem. Businesses seemingly raising capital only to fuel unprofitable growth. The tides are no longer working in your favor.

If you’re in a business that’s trying to take a product to market or that’s spending a lot of time in research and development, you’re in a bind. Even the businesses that are chasing the right CAC to LTV ratio waiting for economies of scale to kick in.

At the end of each month, if you can’t maintain cashflow and you don’t have the reserves in place, this isn’t for you. Recode just aired a really interesting podcast interview with Chamath Palihapitya who basically said that if you can’t invest 36 months runway, you’re probably not going to get out of this mess.

3. Where are you in the value chain?

People have re-prioritized the way they live, they understand that you need to be able to put food on the table before that spa day. If you’re not designed to full-fill needs on that priority scale you’re going to get hurt. During this lockdown, people realized that they can live without a $7.00 coffee as much as they disliked it.

To be very honest, some of our own investments are feeling the heat. We had recently launched Simplebooks.com our accounting services startup (that we’re still very hopeful about) in Bangladesh. It was doing phenomenally well, we had set up a small team that managed to get their first five customers in a matter of weeks.

We’ve been the market leader in business registrations in Sri Lanka for a while and set our sights on expanding. Now, Bangladesh is doing a “not so great” job at managing the disease. As of today, there are 5 reported deaths for 48 confirmed cases.

The country isn’t nearly as ready to handle it, and people are suffering as a result. Now, in a country as large as that, where access to healthcare and food is an actual struggle, registering a business takes a back seat. Even while we’re in lockdown in Sri Lanka, we can’t incorporate an organization or file for your trademarks if the government agencies are shut down.

The solution, at least for us is to participate in ancillary services so that we can capture any revenue we can and manage cashflow to keep the show going. If you don’t have 6 months of cashflow, I don’t see that businesses making it to the other side.

4. Be light on your feet, everything is a tradeoff

Buying runway doesn’t always have to be an uplift in revenue. The easiest thing for any business owner to do is to cut their cost. Rent, utilities, travel or that internal coffee maker, let that shit go. Everything is a tradeoff- your offices, your team, your infrastructure. Keep the things that will help you survive the next six months and get rid of those that don’t.

Sacrifice profitability for the survival of your team. It’s times like this that really show people that you care. Letting go of people should be a last resort.

But at times like this, it’s about ensuring the safety of the many over the unfortunate few. If you have the cash to hold through, great. But in the event you don’t, make sure to renegotiate your contracts, salaries or differ payments. Don’t try to be a hero and sink the entire ship.

5. There’s light at the end of this very long tunnel

Look on the bright side, you’re not the only one going through this. As demand picks up, you’ll be the one standing to serve. The effects of this pandemic has shown that people are resilient, adaptive, interesting creatures.

Businesses went online, models changed and people adopted new ways to work, communicate and solve problems. Their behaviors may have changed but the needs stay relatively the same.

For those of you that have understood how to grow in these harsh environments, remember that you can now employ incredibly talented people that were let go. Fund opportunities for pennies on the dollar and work together with your local governments, they’re trying to keep the economy running a lot more than you think they are.

We for one have looked at a whole portfolio of other opportunities that we’re sinking our resources into. We believe that everything right now is overpriced, it’s a time for incubation not just raising capital. Take a step back, look at the situation and go full speed ahead.

If you’re currently looking for opportunities and are pretty, liquid call me. I’m actually not kidding, we’re looking at lean functional models to incubate the next suite of technology enabled products and services that’s going to come out of this mess.

Recessions have historically been a period of time where you see a massive reallocation of capital, so take a stab at a few things once you’ve got your bases covered. It’s going to be a cash-driven world out there.

About the author

Bhanuka Harischandra

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