With the escalated spread of the coronavirus, GGV Capital is running a 3-session-webinar series with founders around the world to help them navigate the radical uncertainty ahead. Today’s episode is the recording of the first webinar on managing cash flow at this special time, joined by Dr. Brian Gu, President and Vice Chairman from XPeng, and GGV’s managing partner Jixun Foo.
We covered everything from best practices of cash flow management during an external crisis, tips on alternative funding, to macroeconomic shifts startups must pay attention to in the post-virus world.
Jixun Foo is a Managing Partner at GGV Capital and joined the firm in 2006. He is consistently recognized among the top VCs in China and counts 13 of his investments as mega-unicorns or unicorns, including Baidu, Boss Zhipin, Didi, Grab, Hello, Manbang, Meicai, Qunar/Ctrip, Tujia, Mogu, UCWeb, Youku Tudou, and Xpeng Motors.
Brian Gu is the vice chairman and president of XPENG Motors, also known as Xiaopeng Motors, a Chinese electric vehicle company, and a GGV portfolio company. At XPENG, Brian leads the company’s global strategy, finance, fundraising, investments, and international partnerships. Prior to joining XPENG Motors in March 2018, Brian was the Chairman of Asia Pacific Investment Banking at J.P. Morgan. He holds an MBA from Yale University, a Ph.D. in Biochemistry from the University of Washington Medical School and a bachelor’s degree in Chemistry from the University of Oregon.
From where you stand, is this a one–month problem, one–year problem or a three–year problem?
It depends on what you’re focusing on.
On the operational side in China, we expect operation back to normal capacity very soon, probably within three months. We actually started returning to the office setting as early as February 10. On February 24, 90% of our employees have returned to the offices. And we start to see our factory and supply chain reopened in various parts of China.
But on the funding and capital market side, you will probably see the ramifications of this virus’s impact slightly longer. obviously by now, in the middle of a very large shock, all the governments around the world are racing to provide rescue packages. But I think the volatility and turmoil will impact the capital markets for at least six months to a year. In that sense, I think this virus’s impact will probably be multiple years of impact.
Having been in China and out of China for a while, I did see the whole virus situation, it reached a peak in China in the latter part of February. Right now, I think China is in a recovery phase. From all the various data points we get from our portfolio company, a range of portfolio companies including bike-sharing or HR services, we are seeing recovery, anything between 40%, 50% to 60%, 70%.
In the next two to three months, we’ll continue to see recovery across offline services including retail restaurants, etc. I think the rest of the world is still grappling with the issue. The supply chain is a problem. We will have to see how the number of new viral cases peak out, hopefully in the next two to three weeks, if not, three to four weeks before we see a stabilizing point, where the market will know what to expect. How long this is going to take, there’s all speculation. I think nobody really knows. We are hopeful that this whole thing could peak out in the next three or four weeks, and if so, you will take another couple of months from there to see a recovery.
What’s your advice for companies to manage their corporate bank account given that the funding and the economic impact could be longer?
As a company, when you faced with a situation like this, you really have to dig deep and fully understand your financial situation. You need to know exactly what your cash outflow is going to be in the near term and also a medium-term, you need to know exactly where your source of financing or funding will be coming from or how long your existing cash pile will last for your business.
First of all, it is to understand your situation. Some early-stage companies actually don’t really have a very clear picture, and that’s very scary. So I think the first thing is to do the homework and get your team really understand that under the stress test. What can you actually survive on, and how long can you last.
Secondly, you have to look at funding sources more broadly. Obviously, traditionally you will have shareholder equity investment or bank financing, but in this situation, you have to assume all of these traditional venues will probably be very difficult to tap in the near term. Banks are very scared to lend anymore, they may actually want to get their money back. It’s very difficult to raise equity without the travel in the industry, without the ability to do due diligence. It’s very difficult to get people to commit in a nervous market. So you have to look at alternative sources.
For example, in China, one of the ways is looking at government support and funding, I think there’s a lot of subsidies and government loan available to certain private businesses, you need to understand whether those are applicable to you.
You also need to also talk to your partners, including suppliers and counterparties who are interested in potential transactions you signed or about to sign, and really to see whether a way to reduce the cash burden in a situation like this. So, there are a lot of things you have to be actively working on, to figure out where you can get the support in the near to medium term of this turmoil.
Another thing is that this is actually also an opportunity to review your business operations, to reduce unnecessary costs. What I mean is prioritizing certain costs, for example, unnecessary travels, or some unnecessary transactions you may want to put it off. So if you just go through that and really understand what you can reduce, and also have a crisis plan or plan B, or something you can go back to, if you really need to cut down operating costs, where you want to focus on the cuts, where you can actually delay certain payments. This is actually going to be a critical time to have that information in hand.
What are some best practices you have observed as an investor among founders in terms of cash flow management?
When this crisis hit first in China, we spent about two weeks working with CEOs of our portfolio companies. We first take a look at where they are in terms of cash flow, financing, and the balance sheet. And literally looking at cash in and cash out. If you look at the portfolio we have right now in China, and we look at how these portfolios are doing in terms of dollar-weighted in terms of the runway. And by that I mean, we need more conservative assumptions in cash in and cash out, because revenue is going to come down dramatically, in some cases it could be zero. In other cases, even though you may have revenue like advertising revenue, but the collection is difficult. You got to assume a worse number. Whereas your burn rate, if you don’t do anything, will continue to maintain or go up.
One thing that we spend time with our portfolio company is to do scenario planning. Nobody knows how long this thing is going to last at that time in China. So, we actually did a one-month scenario, two-month scenario, and potentially a five- to the six-month scenario. Based on those scenarios, you have to have different scenario plans for your cuts and your optimization.
Regardless, I think we have to do some level of cost optimization, operation optimization, and that could mean cutting some unnecessary costs and unnecessary head counts. It’s actually a good time to rationalize your operation, what is essential and what’s not. And based on that you can really optimize your costs to an optimum level. And you have to be mindful of what you’re cutting as well. You don’t cut your core asset or core competence. So you have to focus on what’s near term and what’s long term.
This is a good time to hire some possible talent and the right talent in the market. So, rationalization and optimization are not just about cutting, it’s about trying to make sense of what you have and try to make sense of what’s important and what’s not.
Fundraising, obviously, we have to assume that it’s going to be difficult. Don’t assume that money is going to come in easily. We did help some of our portfolios to access bank financing, but even then, I must say that bank financing takes time. You will have to take time to work through some of the bureaucracy in the banks as well. So, be self-dependent, rather than trying to dependent on possible outside help.
What are some of the principles that you think people can learn if looking at the current cost items on their balance sheet, where should they start?
I will definitely review the immediate transactions the company is about to do or has planned to do. A lot of the transactions, under the current environment, probably does not make sense to pull the trigger immediately. I think you start with large items, either major CAPEX plan or major transactions, or a certain business initiative or marketing campaigns that you originally were planning.
You should really look at these large cash items and try to figure out whether it is required and priority to do at the moment. You can always go back and renegotiate some of those deals. For example, we are looking at a potential acquisition in China. We have negotiated purchase price, but we are in renegotiating our payment terms, in terms of schedule and also the mixture of cash and equity as a sort of consideration. So all of that at this junction, you should be able to have the power to go back and try to push as hard as you can.
Then you need to look at your business operations and go back to your business plan for this year. Given the environment and consumption and market growth, you may want to readjust your business plan.
And the third thing I think is making the company leaner in terms of operation and efficiency. A lot of things nowadays are more efficient because we no longer traveling to meet in person. We use a lot of online means to do our businesses, even employing online methods to sell cars in China. We try to explore things to be more efficient. And that also helps in the long run, cutting down some of the cost of operations.
The last thing is to have a Plan B. If you’re really forced to reduce your footprint, reduce your cash burn, what are the necessary pains that you have to take the deeper cuts, which area of business is less essential, whether it’s in R&D, marketing or supporting functions. We need to draw that plan up in case you need it.
If I look at the portfolio just mentioned, in terms of impact, today on a dollar-weighted basis, about 20% of the portfolio actually has a positive impact. These are online education, online content, online subscription services, including online fitness, such as our portfolio company Keep. There are a lot more people who are actually doing training, fitness, exercise at home. The rationalization is actually to be more aggressive, providing the right set of content and service, and not necessarily worrying too much about revenue per se, but driving the early adoption in your service, because there is what we call time sandbox where there is a period of time users are actually stuck at home, and they have hours on the internet to spend.
Based on this different level of impact, you have to rationalize what you do. It really depends on your cash runway situation. For example, we just had a board meeting this afternoon with a portfolio company that is a restaurant’s eCommerce business. That business itself is affected. So, they are focusing more on the key cities they have, focusing on their logistics and distribution. Reach within 10 central warehouses that they have, versus trying to expand into more cities. So the rationalization here is really focused. Focus on your core competence, focus on the cities, the business that will help you drive higher leverage, better efficiency in the near term.
And worry less about grabbing the market share because the market share is not going too far away, given everything that’s happening in the market. So focus on productivity, efficiency, and where you can optimize the most.
For companies who have less than six months runway in their bank account, how should they communicate with their existing investor on that? How do they think about fundraising for the next six months?
Only by being honest and upfront, you can have some constructive conversation around what you can do about it. I think at the end of the day, don’t look out for help, look in for help. That’s the first order.
And to be fair, I think investors are looking at you, whether is existing or new, they are looking at you as to how do you handle a crisis like this, how do you deal with the challenges like this.
If you’re always looking out, that’s less likely that external help is going to come. You have to be able to help yourself first. And I have an example here which is some companies doing ad-driven online services. As far as the online services are concerned, It’s actually growing 10%- 20% week on week, because people are spending more time at home, and is consuming more of their content. But ad spending is not going up, in fact, your ad dollars are not collectible. So that’s the challenge they have, they have more servers to spend on, but they have less cash inflow from advertisers. And what they need to do is to rationalize the cost and what the CEO did was he did a pickup. He first rationalized his team by a pay cut across the team as a temporary measure across his team to allow him to have that runway beyond six months period. And that is essential, first of all, you have to survive. Because if you survive and your business is true of value, things will come around for you. If you don’t, then you are dead in a matter of months.
This is very good advice. First of all, being truthful and honest is absolutely critical with your investors. Your investors actually have interests to help you. If you don’t articulate the problem, I don’t think they will be able to know how to help you. But definitely, you have to really think about your own solutions, or what your business plan is before you run to your shareholders with the problem. They will rely on you, being the business operator to really focus on problem-solving and come up with a solution that’s practical. I think they will definitely do their best and pull resources for you if they can help you.
But if you don’t have a game plan, it’s very hard to see a shareholder make miracles happen. Good communication is paramount, but also you should know this is something you need to come up with a solution. You can ask for their feedback or assistance, but you need to have a game plan first.
What are some alternative funding sources that people can look into right now? And what are some dos and don’ts in those among those options?
It depends on how stressed the business is. Obviously, you can look at various levels of financing channels.
First of all, you should look at normal channels, any of the channels that are still able to support you, for example, we have a bank line soon that we can drawdown. But you have to make sure whether that is still the case under these circumstances. In China, the government will make sure that the bank doesn’t pull the lines arbitrarily. There are other funding channels that are probably non-traditional, in China, these days you can go to the government, and they can provide certain assistance. They can actually reduce your tax burden and social welfare payment burdens. You should do that as soon as you can because that is available to all the enterprises in the region.
The third thing, as Jixun mentioned, on the cost side, for example, the largest cost for a lot of private companies are human costs. Actually, a lot of companies today are asking employees to see whether they accept reduced pay or no-bonus. In our case, we actually kept the bonuses but we asked the senior members of our team to take shares instead of cash. So I think that will reduce the cash outlay in the most near term.
You may actually even ask your partners, like your suppliers or your collaborators, or sometimes take merchandise or shares as a way to pay for some cash costs. For example, I know some of the players in the auto industry, they actually give the most automobiles as payment to their advertising agencies, etc. in order to stem the cash outlays. So you should try very hard to negotiate and to do.
Above that, venture debt or other form of short term financing, if it’s available and we are really stressed, you should take whatever form of financing you can, but just keep in mind, a lot of those carrying very exploding cost escalations, and also some of those may actually have implications for company control. So once you take on that, you have to have a really accurate understanding of what you’re walking into. And I will try to avoid some of these instruments unless it’s absolutely necessary.
The internal part that you can do is to manage your finances better. There is external financing that you could access, whether it is bank financing, venture debt or even equity financing. But to be fair, in times like this, these financing comes at a price and a heavy cost. Look at everything happening to the capital markets, the liquidity is really bad. We are talking about a global financial situation here where there’s a huge opportunity cost for capital. So these capitals will come at a price, and sometimes this price may be much heavier than you would think. It is not just in terms of your valuation, you could weigh in on your ability to manage and control the company. So it’s actually far more efficient and far more cost-effective to actually just focus internally first before you go out. Once you strengthen yourself that you can speak with a position of strength to outside investors, you demonstrate strength to a potential investor. And on that basis, you probably can negotiate better on external financing.
For companies who have seen a lot of growth in online services, is it better for them to offer free services for goodwill or actually generate revenue?
I think with the online phenomenon that people used to be four or five hours a day in terms of time span, now maybe, eight to ten hours a day could be double. So you do have this timeshare, people are willing to try new things or new online services, content, etc. This is a good time for user acquisition and capturing some early adoption for your services. I’m not sure is this the best way to monetize at the moment, because in times like this you don’t want to create too much friction to your adoption.
So I would encourage all sorts of ways to encourage online conversion to become your user versus your customer at a moment. Look at what Amazon is doing with the free books, and what zoom is doing with all free video calls that you can do for schools, etc.. It’s a gesture of goodwill, but they are also taking the opportunity to educate the market.
You have to really understand what’s the lifecycle of the company at the moment before you decide which aggressive or more practical path to take. For companies that are well-capitalized, I think this is a great time to grow and take shares from others. For example, Netease is launching free online education. It’s a great time to give good experience to your users and grab a market share. But I can also understand those don’t have the capital, you may want to tone down that acquisition. But in general, I would not focus on making money in this environment. This is for survival. Building a great story and broadcast your messages is more important. Even for XPENG, in the month of February where businesses shut down and there’s not much we can do, we still tried to figure out ways where to touch the users.
It’s not just to make money but make them feel good, for example, we sent out masks to our drivers throughout China. we spent quite a bit of money to procure a supply of medical masks and we sent free ones to our users and received very good user feedback. I think this is a good way to strengthen your relationship with customers. In terms of online marketing and sales, this is also an interesting period that we can actually experiment practices that have not been widely used before, for example, in the auto industry people haven’t been sending cars online as much because it’s a big-ticket purchase, and people like to touch and feel the vehicles, but now people are stranded at home, they have to live and think about ways to broadcast the merchandise to them, so we offer, for example, online direct broadcasting showrooms. We actually partner with Douyin (Tik Tok), the ByteDance in China, to demonstrate our car on the platform. It was actually very successful. I think they actually are using our collaboration model as a way to go to other auto companies to replicate the same format. I think we’ve seen something new in this fire situation, the behavior of consumers and merchandising are rapidly changing. Maybe an optimum time to push on formats that are not been seen before now become normal going forward.
I remembered having the XPENG board meeting a couple of weeks ago when Brian and Xiaopeng himself tell us about the stories. It’s amazing. People are literally willing to make those commitments online through this virtual showroom. So it’s a sign of behavioral shift with this sort of transformation forced by the market because people are forced to do things that they otherwise would have chosen to do it in the physical format and in the offline approach. So it’s amazing how behavior is shifting with this virus impact. So what we want to think about with this is really looking at the future, because the future is going to look different. Just as when SARS hit in 2003, and when the financial crisis hit in 2008, 2009. Things change, behavioral change. We are looking at a behavioral shift in consumption, and this is not just applicable to consumers, it’s also applicable to businesses today. A lot of us are forced to work online, we work through various collaborative platform, like zoom, DingTalk, Lark, etc. So, entrepreneurs should think about what is this new world gonna look like, where they are pushing these, and How’s behavior shifts. As we played out, I think it has a lasting impact, the number of online hours might not be going to be 10 hours like now, it will go back down, but some of the behavioral shift is going to be quite prominent.
What would be some industries that you think would have a big opportunity with the shifting behaviors of people and companies?
I think the whole area of robotics and automation is huge. People will be looking at more services where you have more in need of robots to handle things, especially with the delivery of 5G. By robots. it’s not just a machine working in your factory. It also means cars and drones. These are machines that will gradually become more well-accepted with a 5G network, people are working through the system to accept those new phenomena. The other thing is the whole enterprise behavior shift online. A lot of our work, like how we do a long-distance training, how do we do a long-distance interview or webinar like this, will become more and more normal. Whereas in the past, people still prefer in-person sessions. I think you will see a complimentary of online and offline going forward in a lot of business behaviors too. So I think there’ll be more products and services to preserve the enterprise and the business market.
What we witnessed is that the virus situation caused the increasing interest in private ownership of cars, which is interesting, because obviously in our business, the sector is divided into two main demands, one is the private ownership, the other one has shared mobility and the fleet. And now we actually start to see a pickup in the private ownership, buying in China at least. I don’t know how long this will continue but at least I think that’s a very interesting trend that we picked up. But also, just to follow up on what Jixun mentioned, the cloud will become a very important tool, in this overall trend to move work and life online. The cloud-based services or hosting services, even infrastructure services will benefit from this megatrend. So these areas will be very exciting to watch.
On the flip side of that, what would be some industries that currently we might not be able to tell but in the medium or long term, they might be negatively impacted by?
Not off the top of my head, but I think the way offline services are, whether it’s in the form of retail, restaurants, even offline education center, and tuition center. What’s more immediate to me, will be offline training, because now online training is becoming increasingly a norm. China had actually stopped school since the Chinese New Year. In early March, 200 million kids actually go to school online. So that is a fundamental shift. And now the students and parents are getting used to the idea that online education is okay, My kids are in Shanghai highschool. My daughter is attending online classes from 8:30 am to 4 pm every day with a lunch break in between. She carries his computer around walking from the study room to her bedroom. So it’s very efficient, there’s not a lot of traveling involved. So I think the immediate hit to me is where online replacement is so obvious. I don’t think offline tuition centers will go away, but they will be more severely impacted. Even to virtual showrooms, there’s less need for the physical showroom. Not that there won’t be any physical showroom, but the number of physical showrooms may be less because you can achieve just as much. Or maybe with a smaller size with a physical showroom by complemented with virtual showrooms online. So all these things are shifting. I mentioned about restaurants, the restaurant formats could change, but I think people still want to go out or have parties. So I don’t think that will go away anytime soon but the format of it could change.
You have to look at whether this is a long-term or short-term impact on businesses. Some people just temporarily stop eating, entertaining or gathering, and in a way that they’ll come back after the virus. It’s a question mark. But interestingly, I feel like the commercial real estate business will probably be impacted quite a bit. Because obviously it’s a long-term behavior that’s changing, and people probably use less of the entertainment space indoors, people are probably less likely to have a lot of retail space, because they’re in a fast-changing. I have a lot of friends who are in Hong Kong running the commercial real estate, I think they are facing a perennial business model change. And that will translate into mobility changes, for example, the physical transportation change, because you don’t necessarily have to be in the center of the city for the private real estate. So the mobility business will be impacted as well. In the long run, I think we will see the decentralization of communities and businesses, because there’s no need for people to gather for the traffic.
From the perspective of the supply chain, we’re seeing the situation that many countries are cutting off their connection with the rest of the world, have XPENG being impacted at all and where do you see the global supply chain going in the next five months?
I think the supply chain is under a tremendous amount of stress at this junction, especially if you have suppliers around the world in different geographies. Now, the logistical nightmare of moving things around is just impossible. Fortunately for us, nearly entire our supply chain is China-based. We have suppliers mostly close to our whole manufacturing base. We do have tier-one suppliers scattered in China. we actually have a couple of them nearby Wuhan, which has certain delays of ramping up their production. But in any business, the supply chain has to be really redundancy focused, because you cannot just rely on one player for supplying all important parts, so we always have backup suppliers. There are merchandisers or suppliers that may get their parts from tier two or tier three players, so we are very careful, making sure that their inventory and supply chain is intact. It is a huge amount of tasks to make that run very well. In the next month or two, I think there’s still plenty of inventory supply in China despite this global disruption. But if the situation on the global supply chain shock continues for many more months, I think we will start to see a major slowdown in industrial activities.
Would this summer be a good time to do fundraising? And if so, what would be the growth rate you would look for in the balance sheet? What would you say to people who are thinking about raising?
Honestly, I don’t have a crystal ball about the good time, I do not know how the market is going to evolve in the next six months. I’m hoping that the virus could peak in a lot of major countries like the US and Europe, in the next couple of weeks, and hopefully, we get to a recovery mode from there.
And that alleviates a lot of the financing pressure because a lot of businesses locked down for the moment, so once we got to a recovery mode, we have a better chance of assessing the global financing situation. So I don’t really know when is a good time. But I will say that a lot of good companies continue to get financing. Our portfolio company, a Chinese company, actually close around the financing of 150 million just about two weeks ago, despite the adverse condition in the market.
So the investors with capital are out there. The opportunity cost is there, so investors are highly selective in their choices. It will take time to process. So, anytime is good. But, as highlighted before, the crisis actually brings out the strength, I mean, it brings out the best entrepreneurs.
If you look at Alibaba, Tencent, Baidu, they went through that. it brings out a stronger entrepreneur because you show that you can navigate very difficult times. When everything is good, It’s very hard to tell who’s good and who’s not, all is about spending the money. Now is how well you can spend the money, how well you can rationalize the use of capital. So that’s the real test, and I think investors will be asking those questions and try to seek your thought process, and your ability to navigate this crisis. So capital is available, we are closing deals. The question is just how do you deal with things at this moment. To me profitability is less important, it’s more about how you manage your finances, your cash flow. It doesn’t mean that you’re profitable. If companies are profitable but with bad cash flow, that’s just as bad.
What are some of the things that you’ve learned from previous economic downturns that you have experienced that can be applicable or helpful for people now?
In a crisis like this, the founder and the senior executive have to exhibit clear leadership qualities. One is that you need to provide the entire company a sense that you’re on top of things. You’re ready to jump in with those actions, you know pain points of the business, you communicate that carefully, clearly, and transparently. I think the worst thing is people not knowing what’s going on and worried about it without communication. The lack of transparency will also make your partners worried about you. The worst thing happened is the lack of trust and confidence in the company.
As a CEO or an executive in the company at this critical junction, you need to be more prominent, more visible with leadership qualities, and provide confidence and transparency to stakeholders including employees and partners.
Another thing I learned is the word called the fortress balance sheet, clearly think about building up your war chest, building up your survival pile is critical. That means reducing the burn, finding different ways to increase the cash inflow, whether it’s funding or payment scheme changes, etc. Having more cash at hand to weather the storm. I think leadership quality and fortress balance sheets are probably the most important focus during the crisis period as a senior leader here.
The idea of transparency is absolutely important to the stakeholders. In times like this, you should really try to understand and rationalize your plan early enough. Don’t wait. Don’t be afraid. This is the time to make some of these tough decisions early, and not drag it out and just let time get wasted. You have to be prepared. Draw up your scenarios and make plans with your scenarios, communicate these with your key stakeholders, including investors and your key management team. You have to come to a consensus on what’s the plan and execute it. There’s no replacement for transparency and communication. Demonstrating that leadership, I think by leadership, a lot of which is making those tough decisions early and not wait. The other thing is that, in times of crisis, there is always an opportunity. You have to look beyond the fear. While we act in such a way of caution and deal with the very worst situation, but you also try to look beyond that crisis and see what’s the opportunity ahead for this company. And that’s the part that sometimes people miss when they dig too far in.
So look beyond and try to understand what opportunity represents ahead. This new world that we are in, once this virus is free, and with all these shifts in the behavior, what does it mean for you.
Thank you so much, Brian and Jixun for sharing with us your wisdom.
It was a pleasure.