Corona Virus

How the Corona Virus affects us as a Series A Startup

Dear fellow entrepreneurs,

Just yesterday one of our investors told me, openly dismayed, about one of the other founders in their portfolio:

So [this guy] is veeeery convinced of himself. When we asked him last week about the consequences of the corona virus for his business, he was puzzled: “Which consequences? We’re a tech startup, not a night club or tourist destination that is now missing their customers. We don’t need to adapt to this. We’re raising our round just as before, why should this have any consequences? I don’t really get your question.”

Two days later he came back to us, admitting that part of his funding round just fell apart and he might need a bridge financing in the near future.

Quote from a call with one of our investors

I also met some other founders who thought along the same lines. They were annoyed that they’d need to switch to home office soon, but other than that didn’t feel any need to change anything.

WTF?

Guys, seriously, the world is panicking, and (from a business perspective, more importantly), stock markets are crashing more heavily than on September 11, 2001. How do you come to the conclusion that this won’t affect your business?!?

Dow Jones and German DAX lost more than one third of their value within less than a month.

Institutional investors seem to agree. Sequoia Capital just prepared their founders to brace themselves and re-shared their 2008 “RIP Good Times” presentation. Berlin-based VC Cherry Ventures also warned their founders that “the consequences for your company could be substantial” and encouraged them to prepare emergency plans.

However, as sincere as the corona virus situation is: This is not the end of the world. We, as the startup community, (rightfully) keep patting ourselves on our own shoulders for our ability to change and to quickly react to new situations. Let’s use this ability now to ensure that #StartupLife can go on. While the most-needed thing at the moment, arguably, are medical resources, we also still need innovation, technology, and new jobs. This is something that we can provide – so let’s do our share and contribute to the stability of our ecosystem and our society.

Here are the corona virus measures we take at Sponsoo. This is by no means a one-fits-all guideline, but the very subjective mix of the feedback of our shareholders, online advice like the one from Sequoia and Cherry Ventures, and our own experience after founding 5 startups. As a sport startup, collaborativeness is part of our DNA, so we hope this helps you to prepare yourselves.

1. Keep your Team safe from Corona

This one is obvious. As an employer, you have a moral and legal obligation to ensure the well-being of your employees.

I’m not a medical expert, so I recommend to rather follow the CDC’s corona virus guidelines for businesses. At Sponsoo, we already created a Corona Virus Policy on March 7, when there were just 105 confirmed cases in Germany. We updated the policy on March 13, and shared it here: Corporate Corona Virus Guidelines.

2. Drastically cut down Costs

Sequoia recommends to “spend every dollar as if it were your last”. Luckily for us, we already enacted a strict-cost saving program last year, and cut our burn rate from €25,000/month to less than €3,000/month. At the time, the savings were born out of necessity – now our lean business structure actually gives us an advantage over our competitors.

How did we do this?

  • We reviewed all long-term contracts (software licenses, phone, etc.) and terminated everything that was not regularly used
  • We terminated some work contracts, and didn’t recruit replacements for some team members that quit for other reasons
  • We re-organized our organizational structure to reduce management overhead. Now we’re able do the same work with less people
  • We still managed to double our sales volume. More income at less costs = lower burn rate

3. Switch to Zero-based Budgeting

Zero-based budgeting is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a “zero base,” and every function within an organization is analyzed for its needs and costs.

One example for this is our office rent. Coincidentally, our rental contract will end on March 31. We had initially planned renew it, but following the zero-based budgeting approach, we don’t feel that the costs are justified while everyone is working from home office anyway. As a consequence, we won’t renew our rental contract and store our office stuff in self-storage until the home-office period is over.

If the Corona-induced lock-down will really last several months – as some experts are currently suggesting – we’ll save north of €10,000 on office rent. This is well worth the one day effort to move our stuff into self-storage.

4. Employ a heavily commission-based Sales Structure

In a commission-based sales structure, sales people get a lower base salary, and in turn receive a relatively high commission on all their sales. This reduces fixed costs (base salaries) at the expense of higher variable costs (commissions). It also sets incentives for employees to perform well, and rewards good results.

In economically difficult times, companies can mitigate their liquidity risks by reducing fixed costs.

We have always had a commission-based sales structure at Sponsoo, so there’s little that we could optimize here for existing employees and new hires. However, we are taking things a bit further and are re-introducing our “Sponsoo Agent Program“.

Sponsoo Agents are freelance sales people who work entirely on commission. If they perform well, they can earn up to 50% of the contribution margin they generate with their sales successes. If they recruit additional Sponsoo Agents, they also get a share of their profits.

We had initially experimented with the program shortly after we founded Sponsoo in 2015, but we didn’t really follow up on it despite occasionally generating good applications from a five-year-old blog article. We feel that now is a good time to focus on this program for real!

5. Fundraising: Take all the money you can get

We’re just in the process of raising a round, so we email our investors even more regularly than usual. Within minutes after I sent my last update, two of our investors messaged back:

Hey guys, good efforts! Regarding your current funding round: Brace yourselves, investment freezes are coming! You should make sure to get all the commitments into your bank accounts A.S.A.P!

Quote Sponsoo investor email

Turns out they were right. Promising discussions suddenly stopped:

Even two verbally agreed commitments, one of them from a long-term existing shareholder, were retracted:

Only the signature and the bank transfer were missing to close this investment.

As far as we can see, the following things are happening at the moment:

  • Institutional investors (VCs) are holding back new investment decisions to put liquidity aside for their existing portfolio companies
  • Business angels are suffering heavy losses in their stock portfolio and have less money available to invest into startups
  • Everyone is getting more cautious due to worsening economic prospects

And seriously, who can blame the investors? If a significant portion of my net worth would just have been wiped out by a crashing stock market, I wouldn’t be motivated to invest into a startup, either.

To adapt to the situation, we eased our investment criteria and are now taking in any investments of at least €10,000. Previously, the minimum ticket size was €100,000. This comes at the expense of a messed-up cap table, but in the end, who cares? If that’s the price we need to pay to stay afloat, we’re happy to pay it.

Fortunately for us, most of our investors kept their commitments, so that we now have enough money in our bank account to last more than a year. By the way, that’s also what Sequoia recommends:

Any company without at least a year of cash minimum in the bank is in trouble…

Sequoia Capital, RIP Good Times Presentation

6. Review your Financial and Hiring Plan

With changing financial prospects, you should obviously recalculate your financial plan. For us, this doesn’t mean that we’re now stopping all investments into growth – we’re just a bit more careful and stretch our runway a bit longer.

We’re now working on becoming cash flow positive relatively soon, so that we can make new investments from our own earnings instead of “borrowed money”.

Fortunately, with enough cash in the bank and solid revenues from healthy customers (even in an upcoming economic crisis), our situation still permits to hire new sales people – so if you’re looking for a new job, check out our Job Page.

7. Listen to your Customers’ Needs and pivot your business model, if necessary

Our business model at Sponsoo is to sell sport sponsorships on our digital sponsorship marketplace. The corona virus causes two problems for our model:

  1. There won’t be any live sports events in the next months
  2. When times are getting tougher, the marketing budget is the first place where many companies are looking for cost savings

In other words, much of our inventory has suddenly become worthless, and many of our customers are now out of budget.

However, we feel that this is the wrong mindset. After all, our brands are willing to invest into sports because there’s demand to consume sports, and the demand is still there. The only thing that changed is a sudden shortage of supply.

If my two business administration degrees have taught me anything, it’s that an excess demand is usually a good situation for the supplier (i.e. for us).

We try to see this situation as a chance to fill the supply gap with our own, creative solutions. We also feel that it is our responsibility to help our athletes and sports clubs, who need our sponsorship revenues more than ever.

In the end, we’ll probably be selling slightly different sponsorships to different clients; but we’re pretty confident that we’ll survive and that we’ll be able to keep growing.

To quote Sequoia Capital one last time:

In some ways, business mirrors biology. As Darwin surmised, those who survive “are not the strongest or the most intelligent, but the most adaptable to change.”

Sequoia Capital, “Coronavirus – the Black Swan of 2020

Summary: The Corona Virus is not the End of the World

I hope you took away some insights from our approach towards the corona virus. Please feel encouraged to share your opinion in the comments, especially if you disagree or take a different approach.

Danger is real, fear is a choice.

So don’t panic, be flexible, and stay healthy. Good luck!

Further Reading:

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