Early stage companies – move fast or move aside
Early stage companies have had to move quickly to survive the sudden drying up of cash flow, but there are opportunities for those with the foresight to adapt.
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Companies of all sizes are facing challenges in the face of containment measures intended to slow the spread of COVID-19. But just as there are specific problems being faced by fledgling companies, it’s a sector with potential to adapt quickly to the new circumstances.
The early weeks - a matter of survival
The specific challenges faced by early-stage companies reflect their typical ‘cash burn’ nature. Even in relatively buoyant economic times, a typical early stage company will be spending and investing capital with an eye on longer-term growth. It won’t be able to fall back on multiple years of positive cash flow and relatively easy access to debt and equity capital that larger companies can rely on.
Survival has been the first priority.
Our conversations with the leaders of early-stage, UK-focused companies suggests that government support has been welcomed but of mixed use. The furlough employment scheme has been absolutely crucial to the ongoing survival of companies that have seen a sudden and severe drop-off in revenues.
But the government’s debt financing provisions – such as the Coronavirus Business Interruption Loan Scheme (CBILS), which provides loans with an 80% government guarantee, and the simpler 100% guaranteed ‘bounce back loans’ – can only go so far in providing long-term support.
Finding a way ahead: beneficiaries, survivalists and new opportunities
We have spoken to many of the companies that take part in the Coutts Investment Club, the private equity investment service we provide for eligible clients. They have some interesting ‘ground-up’ intelligence of how they’re navigating the new commercial landscape.
The crisis has been good for companies with products that have benefited from the medical nature of the emergency and changes to how we’ve been doing business.
In our article Coronavirus: The Broader Impact – Health Care, we highlighted the opportunities for medi-tech companies. Technology companies have a similarly positive outlook. These companies remain optimistic and see continued demand for both their services and ample sources of capital.
Tech Will Save Us are creators of a play-led, digital home education system that supports learning throughout childhood, through creativity and technology.
Since COVID-19, the company has seen 110% growth across digital channels, with 100% of sales coming through their website and marketplace. Bethany Koby, co-founder and CEO, says, “Education has forever been changed by this current situation. It’s a ripe opportunity for us to accelerate our plans to launch clubs and subscriptions that leverage both digital and physical experiences which are fun and educational. Kids will continue to need activities that are more at home and we provide some of the best!”
Some companies are pivoting their strategy to accommodate the new circumstances, while they retain their core business. Some restaurants, for example, are switching to takeaways as a business model or delivering prepared ingredients based on their menus while their premises sit idle.
Essentially this allows companies to have ‘optionality’. Their core business can still provide a future value proposition while an additional focus on related business areas that are in demand right now helps them through the short-term disruption.
Rotageek uses cloud-based technology and automatic scheduling to help multi-site businesses manage and schedule staff to meet demand, drive efficiency and reduce costs. They had already established a strong position in the UK retail sector, working with names such as Prêt a Manger, The Perfume Shop, Dune, Pets at Home and O2.
With high street sales virtually non-existent, Rotageek has found a new opportunity in the medical sector. It will support decision-makers to deliver a fast, effective and coordinated response to substantial fluctuations in demand for hospital care. The service is currently being offered for free for the next three months to the NHS and wider healthcare teams impacted by COVID-19.
Chris McCullough, Rotageek CEO, says: “As a former doctor, I am particularly passionate about taking those benefits to the healthcare sector.”
These are companies whose main business is deeply impacted by the global lockdown, for example in the travel and hospitality sectors, or those that rely on traditional retail routes to market.
These companies are seeking to preserve equity value in their business through tight control on cash flow and the government furlough scheme. Most are essentially in ‘holding mode’ waiting for a change to the government safety guidelines and looking at the effect on their products.
WOOF&BREW manufactures and sells a range of unique drinks and health tonics for dogs through traditional pet stores, garden centres, department stores and grocers in the UK and Europe.
In the early days of the pandemic, dog owners panicked and bought dog food in bulk, focusing on necessities rather than dog treats and accessories. The shutdown in the retail sector also reduced the venues distributing their products.
The company reacted quickly and furloughed staff who were unable to work under social distancing restrictions. They’ve also taken steps to increase their online presence and found innovative ways to reach customers.
Steve Bennett, founder and CEO, says, “The government’s furlough system was a very welcome, simple and effective way to ensure that we could achieve the cost savings that we had to make in the short term. At times like this, I also have a great sense of pride when our people – including our investors – pull together and still have the drive to find new ways to work and help ensure the long-term future of the business.”
How should entrepreneurs react?
Many of our clients have experienced significant economic dislocations over their career. This gives our network of investors perspective on how a business can survive, take advantage of opportunities or pivot to a related business line.
Adam sees the current circumstances in stark terms for early-stage companies. “There’s a real opportunity for businesses to completely step-change the speed at which consumer adoption happens. If you’re on the right side of that, it’s great; but if you’re on the wrong side, it’s really hard.”
On how entrepreneurs should respond, he says. “The first thing is, react quickly.
“The second thing – think about the team straightaway. The best leaders have constant, clear and reassuring communications with their staff. I’ve seen that in some of the JamJar portfolio companies, and people have said that the productivity has been incredible as a result - people have really pulled together to get the businesses through it.
“And thirdly, make sure the business has enough runway. This could mean considering staffing levels. The furlough scheme has been fantastic, but some companies are going to have to make redundancies as they look at the parts of their business that are going to be affected in the longer term.”
Reflecting on his experience at Innocent, he acknowledges how difficult this is for today’s entrepreneurs.
“It would have been really tough in the early days at Innocent, before we were in supermarkets,” he says. “We’d have had to really step up what we called our ‘e-Juice’ business, which was shipping smoothies to people that couldn’t get hold of them by post. But it would have been a poor substitute for the shelf presence.”
A new sense of risk drives new routes to market
For investors in start-ups, they are more than ever aware that, outside of a few select companies, re-capitalisation, bankruptcies and mark downs are likely. This could lead to several years of risk aversion. We think this will place a greater focus on how funding is made and a reassessment of the diversification benefits of pooled structures, spreading out the risk.
One bright spot is likely to be in technology and healthcare. In particular, those companies with well thought-out business plans and a defined market opportunity, who will continue to be able to take advantage of an attractive capital-raising environment.
If you would be interested in discussing any of these topics in more detail, please get in touch with your private banker who is ready to help.
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