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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Your complete startup downturn survival guide
During a market boom, startup funding is in abundance. But when a financial crisis hits, investments dry up, making it difficult for newer, smaller outfits to survive. During a period of economic instability, that task might seem even harder. However, a crisis doesn’t have to mean it’s time to shut up shop. Restartup shows how it’s possible—by choosing to embrace instability and seizing the new opportunities it provides—to stay afloat, and even to thrive.
Arunkumar Krishnakumar and Maxson Tee —tech investor, influencer, blogger, and podcaster— use case studies and in-depth interviews with VCs, CEOs, and academics to flesh-out anecdotal crisis-survival frameworks. They introduce you to the concepts, tools and techniques to help you sail through an economic storm.
- The money pyramid—understand your crisis financing options
- Mental Health – drop the societal taboo for the wellbeing of the company and the founders
- Fundraising psychology—go beyond the deck and the proposition to get inside your investor’s head
- Operational efficiencies—know how to cut back but still hold onto your top people
- Embrace the suck—see how a crisis can open up unexpected opportunities
Don’t let a crisis go to waste: stop worrying and use the proven ideas in this book to turn instability into opportunity—and embrace the wild ride to survival and success.
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Table of Contents
Cover
Title Page
Copyright
Dedication
Foreword
Preface
Acknowledgements
About the Authors
CHAPTER 1: Even Shit Floats in High Tide
Introduction
The Macros Matter
Capitalism: The Pyramid Scheme
Role of the Central Banks and Regulators
Virtuous Cycles
Conclusion
CHAPTER 2: Hindsight's 2020
Introduction
Structural versus Event-Driven Crises
The Crisis Timeline
If It Smells Like Funk
Data Collection
Conclusion
CHAPTER 3: Be Your Own Shrink
Introduction
Crisis Is Here
Conclusion
CHAPTER 4: The Surgical Strike
Introduction
The Startup Bell Curve
A 3D Plan of Action
First-Order Optimisation
What Next?
Conclusion
CHAPTER 5: Check Your Mirrors
Introduction
Second-Order Optimisation
The Who
The Why
The How Much
The How
Conclusion
CHAPTER 6: Map the Trip
Introduction
Infrastructure
The Missing Link
Conclusion
Note
CHAPTER 7: From Fiats to Ferraris
Introduction
The 4D Lens
The Business Model Barometer
Conclusion
CHAPTER 8: Hit Refresh
Introduction
Third-Order Optimisation
Build for a Crisis
Conclusion
Notes
CHAPTER 9: Winner Winner Chicken Dinner
Introduction
The Macro Environment
What History Tells Us
Wear Your Mask First
Cold Decisions and Humane Execution
Customer Is King
Infrastructure Catalysts
Business Model Evaluation
All Change
Conclusion
Glossary
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Index
End User License Agreement
List of Illustrations
Chapter 1
FIGURE 1.1 The Money Pyramid
FIGURE 1.2 Capital Flow During Good Times – Virtuous Cycle 1
FIGURE 1.3 Capital Flow During Good Times – Virtuous Cycle 2
FIGURE 1.4 Chapter One Sketch
Chapter 2
FIGURE 2.1 Crisis Timeline
FIGURE 2.2 US Interest Rate.
FIGURE 2.3 Homeownership Rate.
FIGURE 2.4 Top 25 VC-Backed Exits of All Time.
FIGURE 2.5 2019 Global Analysis of Venture Funding.
FIGURE 2.6 Crisis Watch List
FIGURE 2.7 Team Makeup
FIGURE 2.8 Data Collection Checklist
FIGURE 2.9 Chapter Two
Chapter 3
FIGURE 3.1 Chapter Three Sketch
Chapter 4
FIGURE 4.1 Crisis Bell Curve
FIGURE 4.2 Diagnosis
FIGURE 4.3 Soul versus Value Quadrant
FIGURE 4.4 Chapter Four
Chapter 5
FIGURE 5.1 Number of Clicks to Create an Account
FIGURE 5.2 Chapter Five Sketch
Chapter 6
FIGURE 6.1 Number of Internet Users in India from 2015 to 2018 with a Foreca...
FIGURE 6.2 Funding of Artificial Intelligence (AI) Startup Companies Worldwi...
FIGURE 6.3 How Much Do AWS Customers Save?
FIGURE 6.4 Chapter Six Sketch
Chapter 7
FIGURE 7.1 Chapter Seven Sketch
Chapter 8
FIGURE 8.1 Chapter Eight Sketch
Chapter 9
FIGURE 9.1 Chapter Nine Sketch Note
Guide
Cover
Table of Contents
Begin Reading
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Restartup
A Founder’s Guide to Crisis Navigation
ARUNKUMAR KRISHNAKUMAR
MAXSON J.Y. TEE
This edition first published 2021
© 2021 John Wiley & Sons, Ltd
Registered office
John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom
For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher.
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom. If professional advice or other expert assistance is required, the services of a competent professional should be sought.
Library of Congress Cataloging-in-Publication Data:
Names: Krishnakumar, Arunkumar, author. | Tee, Maxson J.Y., author.
Title: Restartup : a founder's guide to crisis navigation / Arunkumar Krishnakumar, Maxson J.Y. Tee.
Description: First edition. | Chichester, West Sussex, United Kingdom : Wiley, 2021. | Includes index.
Identifiers: LCCN 2021000105 (print) | LCCN 2021000106 (ebook) | ISBN 9781119754404 (hardback) | ISBN 9781119754596 (adobe pdf) | ISBN 9781119754626 (epub)
Subjects: LCSH: New business enterprises. | Financial crises. | Business enterprises—Finance.
Classification: LCC HD62.5 .K75 2021 (print) | LCC HD62.5 (ebook) | DDC 658.4/056—dc23
LC record available at https://lccn.loc.gov/2021000105
LC ebook record available at https://lccn.loc.gov/2021000106
Cover Design and image: Veda Kasireddy
This book is dedicated to the spirit of entrepreneurship.
To those who don't take NO for an answer. To those who believe they can change the world and to those who actually have. To those who work through nights to protect their firm even when they have a young family to attend to in the morning. To those who live their passions sacrificing time, money and relationships.
To those who dare to hope!
Foreword
Ever get that sense when you wake up in the morning that life is full of possibilities? Ever felt that burst of energy — and the sense of urgency — to do something different, perhaps to act on an idea that you have? Who inspires you on your journey? And what keeps you going?
Entrepreneurship can be a lonely and emotional experience. More often than not, there isn’t a right or wrong way to start a company. From the onset, founders are faced with a list of daunting tasks: What is the real problem I am trying to solve? Is the market ready for my idea? Do I have the experience needed to take this to market? Who do I need on my team and what type of skill sets and personalities should I look for? What is my burn rate? What is my go-to-market strategy? Who should I approach first? How do I scale? How can I make it sustainable? What are my potential roadblocks? What are the macro variables in the global economy that might impact my business? How well do I really understand my customers?
Taking a company to market involves more than a good idea, grit, and passion. Much of that has to do with timing, strategy, understanding of the market, connections, and yes, sometimes, pure luck. While it might seem counterintuitive to start a business during times of uncertainty, there is no time like a moment of crisis to get people to adopt something new. Especially for a year like 2020, where we have no lack of challenges, and where the pandemic and social unrests have exacerbated the inequalities and inefficiencies that have existed in our society for far too long.
Look no further than the dramatic rise of the digital experience economy and collaboration platforms in the past few months, as a result of new consumer behavior and market trends. Go further back for the likes of PayPal and LendInvest — both started during the last financial crisis — addressing the market gaps that need to be closed.
It is one thing to start a company during good times; it is another to sustain one through a crisis or embark on a course correction in a down economy. What set these companies apart? What pain point do they solve? What made them successful?
It is often said that “history doesn’t repeat itself, but it does rhyme”. What can we learn from the cycles of booms and busts?
Backed by case studies from around the world and filled with strategic guidance and tactical checklists, Restartup is not only a guide for early stage founders, it is also a book of hope that carries us through the dark times — where the crisis we face seems insurmountable at times.
No doubt we are going through a very difficult period — a year like no other, where our lives and work have been upended in ways we could never have imagined. But I believe in human resilience and ingenuity. I believe that we would be able to leverage the lessons learned from tackling the immense challenges that we face as a society — into creating sustainable solutions for the future — for the good of all humanity.
With challenges come opportunities. So buckle up and read on. Remember, you don’t have to go at it alone. Find the tribe that shares your values and your passion. Hang on to the butterflies-in-stomach feeling that you had when you first embarked on your founder journey. Then soldier on.
Theodora Lau, Founder, Unconventional Ventures.
Preface
It was January 2020 when we were just hearing about COVID-19 in China. It already feels like a decade ago. That's been the nature of the year 2020. We had unprecedented forest fires, geopolitical tensions between Iran and the US, the Beirut blast, the Brexit episode, the American elections and Harry and Meghan moving to the US. A year of chaos, not just crises.
In early 2020, I was on a panel at an event focussed on women entrepreneurs. At the end of the discussion, I had over a dozen founders asking me questions around how I thought the startup landscape would change if COVID-19 hurt the economy. I am not sure if the air around us in the room had the virus, but I could sense that it was filled with anxiety. I felt I had to do something about it, more than just giving them piecemeal answers.
I came home and started working on a blog series with several topics on how a startup could deal with a crisis. I looked across my portfolio firms and how they were dealing with it. They all had different plans, some of them felt they would fly, some of them felt they may have to slow down, a few others wanted to see how the market changed for them through February and March 2020 to then make a decision. There was a minority who felt they would be irrelevant if lockdowns happened.
It was quite clear that a crisis didn't have a homogenous effect on the innovation ecosystem. Yet, there was one homogeneity across these startup founders I spoke to. They were all anxious, if not depressed, because they didn't have enough information about the nature of the crisis. Remember, we are still in early 2020.
As we entered March 2020, it was dawning on us how bad the world was going to get hurt by this crisis. My portfolio firms had by then drafted several plans – A to B to C – and some of them had implemented their plans, too. A couple of them got lucky as the lockdown brought growth. Yet, one common theme across the firms was that founders who were agile and quick in making clear and tough decisions seemed to be do better.
By then my idea of writing a blog series had grown just because of the number of topics I could cover. In the past few years, I have had the pleasure of working with Max at our VC firm, Green Shores Capital. We had a little office at Mayfair in London and had numerous discussions, brainstorming sessions and heated debates using the glass walls of the office as our whiteboard.
Both Max and I felt that we should come up with mental models and thought road maps to help entrepreneurs be better prepared for a crisis. We spent a few days working on Miro mind maps and putting together various strategy topics that we would like to discuss in the book. We still hadn't considered one critical topic that this book now has – mental health.
However, as we started talking to entrepreneurs through March and April of 2020, we understood that even those we rated as the best entrepreneurs were too close to the problem, too stressed and had trouble communicating effectively to their teams. We also saw many of them struggle with time management and a couple of them struggle with anger issues. These interviews were eye-opening for us because we hadn't ourselves realised the criticality of mental health amongst entrepreneurs.
We spent quite a lot of time researching about the topic, speaking to professional coaches and mental health experts. Legends in the venture capital industry such as Jerry Colonna, author of Reboot, and Brad Feld, the managing director at the Founding Group, openly discussed their depressive episodes with us when we reached out to them. In a world where we are taught to brag ‘I am Superman’ and ‘I am immune to the deadliest virus’, we found vulnerability refreshing and genuine.
We also spoke to more than 50 CEOs, VC professionals and central bankers for their thoughts on how founders should respond to a crisis. In essence, this book is a summary of personal and professional experiences of all these experts that are structured into frameworks and mental models that startup founders can benefit from.
We have 3 key themes across the book. The first is about the macro environment that startups operate in. Entrepreneurs must understand the functioning of capital markets, the flow of cash and how this flow could help or hurt their progress. This would also help them understand the impact that an economic shift can cause to the market they are serving.
The second theme of the book is mental health. Of its 3 themes, this is the one where most work needs to be done globally. From Silicon Valley to Bangalore, from Scandinavia to South Africa, founders fear talking about their mental health. It is considered taboo; worse, it is considered a sign of weakness even by the most accomplished CEOs and VC investors.
All members of the innovation community across the world must spare a thought for the entrepreneurs. In crude commercial terms, entrepreneurs are the ducks that lay golden eggs. We cannot be more focussed on the golden eggs and less focussed on the ducks. That's madness. It is the responsibility of the investors, board members, mentors and all others who feel they are part of the innovation community to respect, understand and support the entrepreneurs they work with.
The third key theme of the book is strategy. Max and I quite enjoyed working though this part of the book. Our approach to the strategy part of the book was to look at a topic of discussion and come up with the simplest way of articulating it as a framework. I had several 4 am moments, when I would come up with an idea, write it on a piece of paper, improvise it digitally, hoping I would get a ‘wow’ from Max.
Max would then do his due diligence on these models: ensure they add up and help refine them and in some cases further simplify them. It has been one hell of a journey. The strategy part of the book starts with the tactical aspects of going lean and mean in response to a crisis. We then look into how an entrepreneur can assess the market landscape, customer behaviour and slowly steer the firm in the right direction. When none of this is possible and a drastic pivot is needed, we have discussed how that can be achieved, too.
This book has been an intellectual rollercoaster for us. We came up with a few basic hypotheses (with our frameworks), validated them with the market (through our interviews), enriched them (with mental health angle) and are presenting it to you hoping we will hit product–market fit. Here is a little poem from an amazing mind to kick-start your journey with this book.
As you took the mirror
Outside your home,
You knew not how to hold it –
That which your passions made.
It crumbled to several pieces –
Each piece sharp and hurtful.
Passersby suggested how to fix it,
But each time you did and looked in,
Another form of yourself you saw.
And each felt wrong and distorted.
You finally shut them all out
For you knew this was your job
To fix, To mend, To heal.
And that you did,
With long thoughts in silence,
Reflecting where each piece belonged,
If it did, and in what shape.
Finally done it was and
You looked at yourself
Wondering what you had created.
What you felt you knew not
Except that one voice loud and proud,
That this was your work.
A poem by Meera Ganesan
Happy reading.
Startup is like an invisible mesh of trust.
Akshay Sharma, CTO at Doc.AI
If you have a warm introduction, you are 13 times more likely to get funded.
Alice Wagner, managing director at the British Business Bank.
A crisis triggers a flight to quality behaviour amongst investors. The top quartile of startups typically gets the lion's share of the capital.
Arvind Purushotham, global head of venture investing at Citi Ventures
A startup is trying to find what works in a series of experiments, many of which fail.
Brad Feld, managing director at Foundry Group
A lot of things change in a crisis. As an investor, you are not really backing a business or a market in a crisis. You are backing the founders to find the right opportunities in the market.
Camilla Dolan, partner at Eka Ventures
As the crisis hit, we focussed a lot on ecosystem work and bringing people together. I felt like if we VC investors were lost, I couldn't imagine how founders felt.
Carmen Alfonso Rico, partner at Blossom Capital
Don't just do a pivot for the sake of attracting funding and or trying to show product-market fit for whatever you have. So I think the biggest question is, why should you pivot?
Chitresh Sharma, former CEO of Swipii
If you're in a fintech startup, where the team is young and visionary, you might be missing something, which is someone who's been on the block. Find a grey-haired person who has dealt with regulatory bodies.
Chris Skinner, author and nonexecutive director at 11FS
If you are in Europe, tap into government funding. It can be a good source of capital during a crisis.
Christophe Pechoux, partner at Consilience Ventures
A startup working with a CVC investor would need to be very good at building relationships not just with the person writing the cheque but also the business lines who could have synergies with their proposition.
Claire Calmejane, chief innovation officer at Societe Generale
Based on my own experiences, a lot of mental health issues boiled down to people not recognising and asking for help when they need it.
David Fogel, cofounder at ADV and Alma Angels
Your values are the lenses through which you see the world. And so for me, you've just got to stay true to what your values are.
David Brear, CEO at 11FS
Focus on the customer's pain; focus on wins for the customer.
Emma Maslen, vice president and general manager, EMEA & APAC at Ping Identity
They say great companies are built in times of crisis because if you survive that shit, you come out on the other side pretty lean and pretty mean.
Fred Destin, founder at Stride VC
A VC investor's job is to help manage crises. If everything goes well, nobody needs me.
Ganesh Rengaswamy, cofounder at Quona Capital
When you have legends on your cap table, and you have a good idea at the right time, it's pretty hard to mess that up.
Howard Lindzon, founder at Social Leverage
Founders really need a coach and a mentor to be the impartial third-party support systems.
Hussayn Kassai, CEO and cofounder at Onfido
True grit is kind. Resilience is the path; equanimity is the goal.
Jerry Colonna, author of Reboot: Leadership and the Art of Growing Up (HarperCollins) and co-founder of the executive coaching firm, Reboot.io
As a woman entrepreneur, I knew how hard it's going to be. I knew that I wouldn't be able to do the marathon if I didn't invest in my mental health.
Joyeeta Das, cofounder and CEO at Gyana
A lot of money comes with a ton of expectations. When you raise a lot of money, you [must] become more careful and disciplined in terms of how you deploy that capital.
Kelvin Au, head of Ventures at Founders Factory
Experiences during a crisis can help us find a sense of perspective and rethink what we want to do in life.
Kunal Mittal, chief product officer at FrontM
I've learned that negative momentum is almost as powerful as positive momentum. We always need some kind of momentum. Up or down is better than flat.
Lizzie Chapman, cofounder and CEO at ZestMoney
I've told a number of CEOs to just reach out to me as a friend. Forget that I'm an investor, just call me as a friend, share with me the uncertainties that you're facing as a person and as a leader of an organisation.
Manuel Silva Martinez, general partner at Mouro Capital
As the crisis unfolds, the messenger is often as important as the message.
Mari Sako, professor of management studies at the University of Oxford
A lot of success is based on whether or not the founder is able to tough it out to a certain point with things. This makes it imperative for founders to keep a lookout for their mental health.
Mary McKenna, expert advisor to the European Commission
Even something as simple as putting an out-of-the-office and saying, I'm not available or blocking your calendar can be the modelling behaviour that the founders can do. The notion of being available 24/7 is not sustainable.
Monica Brand Engel, cofounder at Quona Capital
I just believe that if you know what your values are, if you can know what makes you tick and if you can make good decisions and be happy with those decisions, then there is a really powerful ripple effect from that.
Natasha Chatur, associate coach at People Untapped
Unlike previous crises when the impact was largely on the Western world, with the COVID crisis, the entire globe is shrinking at the same time.
Managing Director of South Asia and MENA at Ripple
Most young companies identify and exploit an error in a regulated area in such a way that the incumbents think they're protected by it.
Nicola Persico, professor at Kellogg School of Management
Entrepreneurs often solve the world's problems, and there're always the brave ones, the pioneering ones who will go in and fight the cause. I think a crisis can be a massive opportunity for entrepreneurs to lay their claim.
Nicole Anderson, managing partner at RedSand Ventures
Painting pictures and stories for people in the hearts of crisis is really important to the way they can connect to you.
Nigel Morris, nonexecutive director at Guardian Media Group PLC
As funding dries up for fintechs, they may have to rely on partnerships with incumbent financial services firms, which could potentially lead to consolidation.
Pinar Ozcan, professor of entrepreneurship and innovation at the University of Oxford
For VC investors in emerging markets, the accelerated digitisation in 2020 might come as a boon. LPs would likely double down their investment in us as their allocation for technology innovation increases.
Rabeel Warraich, founder and CEO at Sarmayacar
In most corporates, and particularly banking and financial environments, they still kill the guy who fails. That needs to change.
Richard Turrin, author at Innovation Lab Excellence
Disruption is not adding a new product to the product line if it's being sold to the same set of customers in the same way and just creates a different form of revenue generation.
Ron Shevlin, director of research at Cornerstone Advisors
Founders are time travellers who have seen the scene or lived in the future, and they come back to the present to build that future.
Rory Stirling, partner at Connect Ventures
Crisis is an excellent time to re-evaluate a startup's problem statement, altering positions based on the current situation.
Sabine VanderLinden, cofounder and CEO at Alchemy Crew
Ensuring that there is clear and consistent communication is extremely critical. What is impeccably important is that you deliver the messaging honestly to the team; don't sugarcoat it.
Sachin Jaiswal, cofounder and CEO at Niki
It's a huge generalisation, yet, I think women have always struggled to raise money. We learn to do more with less even in the good times. That comes in handy during a crisis.
Sarah Turner, cofounder and CEO at Angel Academe
I think a key differentiator is that very early on when we set up our cost model, we kept it as variable as possible. That kept our cost structures efficient.
Simbarashe Rusike, VP of finance at Assurance IQ
I normally look at crises in three buckets. There's this structural crisis, like the global financial crisis, which is a balance sheet issue. Then, there is a cyclical crisis, which is inflation, unemployment, things like that. And there is something called an event-driven crisis.
Sopnendu Mohanty, chief fintech officer at Monetary Authority Singapore
Whenever we go out to pitch, you always want to talk about who you have in the cap table as a hook for them to come on. It says a lot.
Victor Chang, corporate legal counsel at Curve
That is one of the really clarifying things about a crisis. It calls so many previously forgotten assumptions into question.
Victoria Fram, cofounder and managing director at VilCap Investments
You need to be resilient and optimistic to get through the rejection that comes with being a founder. But to be a leader, you need to be a good listener, be insightful and potentially vulnerable.
Yifhat Ernstein, Executive Coach
Acknowledgements
Arunkumar Krishnakumar
With another book began another journey, yet those whose life faced disruption supported it unconditionally. Thanks to my wife and my daughters for allowing me the time to do this.
The book wouldn't have happened without Max, who kept us honest on the quality of the content, stories and the completeness of the models we created for the book.
Maxson Tee
Never have I ever thought that I would be writing a book. It has been a hard but rewarding journey. None of this would have been possible without my coauthor, colleague, mentor and friend, Arunkumar. I am forever indebted to him for his patience, kindness, friendship and guidance.
To my family – thank you, Josephine Chai, my mum, for always being the person whom I could turn to during my darkest periods. Alfie Pok, my mum's partner, for being a father figure to me when I needed it the most. My little brothers, Jason and Dickson: thank you for your care and support in my life.
We thank …
We thank all the entrepreneurs, VC investors, innovation thought leaders, academics and central bankers who contributed to this book. It was a difficult period for the whole world when we started writing this book, and they were very generous with their time. Some of them even offered to spend more time with us than initially planned and provided introductions to help us with more interviews.
We thank all these super women …
Our friend and colleague Theodora Lau, who has kindly written the foreword but also provided critical feedback on the coverage of topics that helped us.
Dr Rajeswari (Arun's mom), who helped us with the Shakespeare quotes for every chapter. It was an interesting experience explaining the gist of a chapter in a business book to a professor of English literature. She would then come up with several pages of quotes per chapter, and we would choose one of them.
Veda Kasireddy for doing the cover art for us. We weren't the easiest to please, and she did a patient and a tremendous job of nailing the theme of the book with her artwork.
Meera Ganesan, for allowing us to use her poem in the preface of the book.
A special shoutout to Doris and Raji at Firebrand Labs (FBL). Without these two amazing women, the visual deliverables wouldn't have reached us in time and in style. Team FBL have added a spark to the design elements of the book.
To the awesome Wiley editorial team – Susan, Purvi, Gemma and Gladys. Thank you for keeping us honest with our content, language and timelines.
This book is a result of several amazing minds contributing selflessly to give back to the entrepreneurial community. Thanks to that spirit of giving!
About the Authors
Arun
Arun is a venture capital investor at Delphos International, and previous to that at Green Shores Capital. He sits on the board of several of his investee firms. He is a managing trustee at Aram Foundation, an NGO in India focusing on water conservation. Previous to becoming a VC investor, Arun spent most of his career in Barclays and PwC within data and technology.
In 2020, Arun published a book Quantum Computing and Blockchain for Business. He is the founder and podcast host at One Vision (one of the top 5 fintech podcasts in the world). He was a blogger on DailyFintech, which is the second most read fintech blog in the world, where he has contributed more than 150 posts over 3 years.
As a by-product of his investing and writing career, Arun is also one of the top 100 Onalytica fintech influencers and one of the top 100 Refinitiv's global social media leaders in sustainable investing.
Arun holds a master's in finance degree from the London School of Economics and a postgraduate diploma in global business from the Said Business School, University of Oxford.
Max
Maxson is a product manager, strategy professional and an investor. A scout for Green Shores Capital and Founders Factory, he has spent the last few years reading and learning about the technology entrepreneurial ecosystem. Prior to his current role, he was a product manager, building award-winning technology software at Finastra and a founding team member at AgriLedger, working with The World Bank to support smallholding farmers.
Maxson holds a master's in engineering with finance from University College, London. He lives and works out of London. You can visit him online on Twitter (@maxsontjy).
CHAPTER 1Even Shit Floats in High Tide
All that glisters is not gold,
Often have you heard that told:
Many a man his life hath sold
But my outside to behold.
Gilded [tombs] do worms enfold.
— William Shakespeare, The Merchant of Venice
Introduction
Five years back, I was pitching to an investor for my venture capital (VC) fund. I showcased the startups I had invested in and explained how well they had all performed since the investment. He was quiet for a few seconds and responded,
“Even shit floats in high tide.”
He had observed that all our investments were made during bull markets. He continued to push me onto my backfoot, saying our investments should withstand a crisis to really stand apart. I was shaken by his comment because he was right. I remember telling myself, ‘This is it, I've lost it'.
All the investments I showcased to him had happened in 2014–2015 when the market was pretty healthy. He had seen through my sales exercise. Somehow, miraculously, I won him over and he became my cornerstone investor. One thing led to another and we later partnered to set up Green Shores Capital. Together, we have so far invested in more than 15 startups, and many more individually. However, the philosophy has often been about assessing how well a startup would perform at times of stress.
In 2019–2020, we have closely followed trends about the rise of investments into late-stage startups, fall in VC investments in Asia, the rise of corporate VC and the rise, and subsequent struggles, of the Softbank Vision Fund. These were macro trends that we have been keeping tabs on. We also witnessed a slowdown in funding for early-stage startups during 2019. However, as the COVID-19 crisis has unfolded, we've seen activity fall off a cliff.
We reached out to all our investee companies, discussed their plans and suggested ways they could navigate the crisis. We made several observations during those conversations. There were differences in the way each of them approached the crisis. We saw nervousness, resolve, confusion, hope and, in a few cases, excitement.
Everyone entered the same crisis, yet the way companies have reacted to the crisis varied remarkably. This is largely because of how they had set themselves up for crisis. That led us to think through the ‘Why?’ behind the way our investees have responded. During our due diligence process at the time of investing in these companies, we analysed their preparedness for a crisis. But very few will disagree if I said, ‘You cannot be completely prepared for a crisis’.
In this book, Max and I will go through the journey of a startup getting into a crisis, living through that crisis and emerging out of it. In the process, we will bring together insights from across the world – from VCs, startup CEOs, central bankers and ecosystem stakeholders. We have chosen a few case studies that we will pick best practices from and highlight them throughout the book.
In this chapter, we will discuss why it is important to understand that the bull (market) has been running for too long. This comes from regularly keeping tabs on the key markets across the world, understanding how the macros affect the startup ecosystem, assessing the potential scenarios that could unravel and staying sufficiently nimble to respond effectively.
If you are an entrepreneur, you might want to ask, ‘Why should I be interested in all that? I have enough on my plate with just building my product and selling it’. Remember, successful entrepreneurs are generally compensated so well, not just because they have built and sold a product. They equip themselves with information to navigate their firms through both market highs and lows. Now, let us turn to why the macroeconomy matters and how an understanding of that helps an entrepreneur to make informed decisions.
The Macros Matter
Be it in fitness or finance, the macros matter. Let us first start with the scenario we were in before the COVID crisis hit. A raging bull market that just couldn't be stopped. The Brexit vote was finally behind us and market sentiment had improved. Europe saw a huge influx of institutional capital and there were VC funds with a lot of dry powder*.
*Dry powder refers to the amount of cash reserves available with VC and private equity funds.
We knew things were unsustainably rosy and on the surface we celebrated every single win: new client contracts, investments at crazy valuations, expensive hires, glossy PR and the list goes on. The Burn rate* for businesses was so ridiculously high that we asked ourselves, ‘What do they spend so much money on every month?’; however, we ignored them because times were good. I wouldn't go as far as claiming there was a systemic bubble forming before the COVID crisis hit, but there were sporadic signs of an overheated market.
Burn rate refers to the cash outflow that businesses incur every month.
Startups claimed crazy valuations during investment rounds. I remember sitting at a pitching lunch session at Mayfair in London. There were about 15 family office and VC investors sitting around the table, and there was one firm pitching to us through the expensive lunch that was served. The firm pitched for a £12 million funding, had an artificial intelligence (AI) component that was revenue-generating and were building a Blockchain component to enrich their product offering.
They had a burn rate of £1 million per month, had raised £9 million only a few months ago and had made about £300K in revenues over the previous 12 months. They weren't fundraising to grow their clientele on an already revenue-generating AI component; instead, they chose to invest into a potential add-on using Blockchain. The £12 million, they claimed, would help the whole product to be rolled out in 9 months' time, after which they were planning to fundraise again. They were valuing their firm at £72 million.
Pitches like these make me cringe. However, they did win some investors from that pitch. Those were times when investors had a lot of capital. When we see consistent deployments of capital into low-quality propositions such as the one I described, it is often a sign that people do not know what to do with their money and are desperate to deploy. That leads to bad investment decisions, and when a wave of bad investments collapses at scale globally, it can result in a recession, as it did in 2008.
We saw a bit of that when Softbank Fund I struggled after the WeWork episode and hasn't been able to raise its second fund since. If you are a startup, you could be asking, surely Softbank is a multi-billion-dollar player, and why would it have a capital crunch? Hold on to that question; it will be clear when we discuss the capital pyramid.
During several events, discussions and social media interactions, I have been asked why VC investors don't deploy in certain types of assets or at certain times of business cycles. That is because not all the capital deployed by a VC is from the partners of the firm. There are other investors behind the scenes, called limited partners (LPs), and they can dictate terms. So, the risk appetites of VC investors differ in line with the risk appetites of their LPs.
Therefore, it is critical that entrepreneurs understand the macro variables that could potentially hurt or help their business: events that are not close to their day-to-day reality, such as an interest rate hike or fall, a sovereign default or a large institutional investor failing to raise its second fund. All these have an impact on the innovation community and the flow of capital into startups. A good understanding of these macro events and their potential repercussions help startups and their management team stay prepared for any structural events.
This might not seem as important when the markets are booming, but, much like bad times, good times don't last either. Therefore, it is always prudent to stay on top of macro trends that affect capital flows. Without further ado, we shall dive into the money pyramid that the capital flow is built on.
Capitalism: The Pyramid Scheme
The world of capitalism can be visualised as a money pyramid. It can be imagined as a pyramid that has capital flowing from top to bottom, with a few, mighty firms at the top. As capital flows from one tier of the pyramid to the next, value is added and the organisations in the tier are compensated for the value addition. Let's go through the institutions that make the pyramid work (see Figure 1.1).
Tier 0
Central banks sit at the top, ensuring there is liquidity (money flow) in the system. They are also interested in ensuring that the markets are behaving and consumer appetite is optimal. They keep track of their region's business landscape, trade balance, inflation, consumer spending, foreign direct investments and market sentiment. They have a few tools, such as interest rates and quantitative easing, to manage some of these factors that they continuously track. The amount of liquidity within the pyramid is often influenced by the policies that central banks enforce.
Tier 1
Wall Street banks and large blue-chip firms schematically sit below the central banks on the pyramid. In the context of understanding liquidity in the capital markets, they can be viewed as Tier 1 organisations. They are the means through which capital is distributed across the system. The health of these financial institutions and large corporations often reflects the health of the economy.
On top of facilitating liquidity throughout the pyramid, in recent times these organisations have directly interacted with technology startups through innovation labs, corporate venture funding and joint ventures.
Tier 2
Tier 2 of the pyramid is where institutional investors such as endowments and pension funds operate. This tier receives capital from organisations and their employees who contribute to pensions and endowments. Endowment and pension funds distribute capital to other parts of the system from this level. Based on their risk appetites, they allocate capital across different asset classes from equity, fixed income, real estate and PE.
Tier 3
Tier 3 is what entrepreneurs need to understand closely. This tier of the capital pyramid comprises of the specialist money managers who run niche investment vehicles to address specific categories of investment. They have specialist skills to address an underserved market or find the much-needed alpha for Tier 2 organisations.
FIGURE 1.1 The Money Pyramid
Tier 3 can be categorised as VC and PE organisations that are private market players and hedge funds that invest into public markets. In more recent times we have large corporations setting up their venture investing arm. These are called corporate venture capital (CVC) firms. CVCs are Tier 3 organisations that have been a growing segment of institutional investors since the 2008 crisis.
Private market investments involve deploying capital into firms that have not yet been listed in the stock market. Public market investments are those that are deployed into assets listed on an exchange.
