With countries, communications and businesses so closely linked in today’s global economy, the impact of a similarly worldwide pandemic like COVID-19 will be and is being felt across both public and private spheres – governments, whole industries, societies, businesses and individuals.
China, the first frontier in the fight against COVID-19, is already working to get back on its feet – in XPENG Motors, about 90% of our team were back in the offices in late February.
While I can estimate that it would take about three months to get operations back to normal, the same optimism cannot be applied to the markets or businesses in countries who are currently facing the pandemic.
For starters, the capital markets are in the middle of a very large shock, with governments around the world racing to provide rescue packages to help their respective economies see this time through. However, I think the volatility and turmoil from this could impact the capital markets for the next six months to a year at least, and many economies will likely be seeing the fallout for a few years.
In a business climate like this, what can startups do?
Fortress Balance Sheet
When I was in J.P Morgan, Jamie Dimon frequently used the term ‘fortress balance sheet’, which is about having cash levels that enables a company to withstand shocks.
Building up a war chest for your business is critical, and this includes reducing the cash burn: finding different ways to increase the cash inflow through funding, or reducing or changing payment schemes.
When you're faced with a situation like this, dig deep and make sure you fully understand your financial situation, and have crisis backup plans in the event you need to make cost cuts. Think of this as an opportunity to really review your business operations and develop crisis plans.
You need to know exactly what your cash outflow is going to be in the near term and medium term, where your sources of financing or funding will come from, or how long your existing cash pile will last for your business.
Talk to your partners, be it your suppliers, or those who are about to sign potential transactions with you to find a way to reduce the cash burden.
Start with the major transactions, business initiatives or marketing campaigns that are in your company’s pipeline and figure out which are required and most important to your business at the moment. You can always go back and renegotiate some of those deals. You have the power to go back and try to push as hard as you can.
For XPENG, we are looking at a potential acquisition in China. While we have negotiated the purchase price, we are renegotiating our payment terms, in terms of schedule and the mixture of cash and equity as part of the considerations.
Secondly, I think you have to look hard at funding sources. Obviously, you’d have the traditional shareholder equity investment and bank financing, but in this situation, let’s assume all of these traditional venues will be very difficult to tap in the near term. It's very difficult to raise equity at this point, with the restrictions on travel, and the inability to do due diligence. It's going to be just as difficult to get investors to commit in such a nervous market, so consider alternative sources.
In China, one of the areas a lot of people are looking to is government support and funding. I think there are a lot of subsidies and government loan packages available to private businesses, and you need to understand which of these are applicable to you.
And the third thing is the human cost. The largest cost for a lot of private companies are salaries and bonuses. Speak to your employees and ask if they can accept reduced pay or no bonuses to reduce the cash outlay in the short term.
In XPENG’s case, we asked the senior members of our team to take shares in the business instead, in place of cash.
You may consider negotiating with your partners, suppliers or collaborators to accept merchandise, or shares to pay for some of the cash costs. Some companies in the auto industry offer automobiles as payment to their advertising agencies in order to stamp the cash outlays.
The last thing you should look at is your Plan B – if you're really forced to reduce your cash burn, what are the deep cuts that you have to make in less essential areas of your business? This could be R&D, marketing, or supporting functions. Draw that plan up in case you need it.
Don’t be afraid to adapt your plans
Go back and look over your business plan for this year – I’m sure in the beginning, a lot of you have drawn up robust plans for growth, investment, brand building, push channels and so on.
Given the current environment with reduced consumption and low market growth, you may want to readjust your business plan with a very close eye.
There’s also no better time to focus on making your company leaner and meaner in terms of operation and efficiency. Explore methods to become more efficient in the way you do business. With in-person meetings and travel taken out of the equation, you may find that doing business has become more streamlined.
Consider looking to online leads for your business – even selling cars in China employs a lot of online methods. These will help in the long run too to cut down on operational costs.
Communicate your game plan to your shareholders
In times like this, as a CEO or an executive of the company, you need to take charge as a leader, and provide confidence and transparency to the stakeholders, employees and partners. Your actions must show that you are on top of things – ready to jump in when needed and communicating pain points of the business carefully, and clearly.
The worst thing is to be uncommunicative and leave your people in the dark and worried. This leads to a lack of trust and confidence in the company among your partners, shareholders and team, and it can really drive a business into the ground.
Being truthful and honest is absolutely critical with your investors. If you don't articulate the problem clearly, they will not be able to know how they can help.
Consider looking to online leads for your business – even selling cars in China employs a lot of online methods. These will help in the long run too to cut down on operational costs.
But you must know the solutions you need, and your business plan, before you take the problem to them. As the business operator, they will rely on you to problem-solve and come up with a solution that's practical so they can help you.
It is in their interests to help, and I think they will definitely do their best and offer resources. So good communication is paramount with your key investors - ask for their feedback and assistance, but you need to have a game plan first.
Know What You’re Walking Into
Depending on how stressed your business is, there are various levels of financing you can look at. Some of these channels are quite expensive, and quite burdensome.
Look to the normal channels first – any of the channels that are still able to support you, like a bank line, and make sure they can be still used. While your governments may make sure that the banks do not pull the lines arbitrarily, you need to find these out.
For other non-traditional funding channels, your government could have assistance you can request, like reducing your tax burden or social welfare payment burdens.
Keep in mind that if you do take up any financing, have an accurate understanding of what you're walking into, and be very careful. Many such channels may carry exploding cost escalations and some of these also have implications for company control.
Take up short-term financing like venture debt if it’s available, and your balance sheet is really stressed. Otherwise, I’d try to avoid some of these instruments, unless it's absolutely necessary.
Build Your User Base with Goodwill
With the switch to remote working and social distancing, there is greater reliance on services and platforms that connect us to experiences and communications. For companies that are well capitalized, this is a great time to grow, provide a good experience for your users and grab market share. But of course, you need to understand the life cycle of your company and where it is at before you decide on what path to take; this is also cost to your business and you may not have the capital to acquire aggressive growth.
In general, I would advise against making money or monetising your services in this environment unless it is for survival. Now, building a great story and broadcasting your messages is more important.
On the Speaker
Brian Gu (顾宏地), is the vice chairman and president of XPENG Motors, also known as Xiaopeng Motors, a Chinese electric vehicle company and a GGV portfolio company. The company designs and manufactures what it calls “Internet cars” which has AI technology integrated into the vehicles.
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. At XPENG, Brian leads the company’s global strategy, finance, fundraising, investments and international partnerships.
