Updated: Jul 24, 2021
Why many start-ups are struggling during post-pandemic recovery?
"I heard you bought a new car! How is the AC?" I asked my friend during a catch-up call a few years ago. "It's on full blast!" he replied. I could almost see him beaming. But what may sound like an innocuous conversation between two old friends has an inside story. My friend is the co-founder of an education start-up that went through the usual ups and downs of the journey. In a past conversation, he had discussed how he was so 'cash-strapped' that he had to drive without the AC on– to save on fuel (and cash). Now you understand that the AC was not just blowing cold air; it stood for ‘ample cash’ too!
I can feel every entrepreneur reading this, recalling a similar endurance test they went through with their own form of 'AC austerity'. This is common among many start-ups – especially social enterprises (SE’s), where margins are low and the customers’ ability to pay is also challenging. These start-ups traverse a tight risk-envelope, balancing impact delivery with sustainable operations. This is primarily because not enough ‘success-planning’ is done, as most of their focus is on fighting fires and sustaining business. They all have plans ‘B through Y’ in case they meet failure, but forget to plan well enough for the scenario where they succeed and have to scale rapidly to capitalize on that success. Specifically, they fail to formulate a plan to manage their cash flows efficiently, and hence have the ability to execute orders and continue servicing customers. Each customer segment has its ‘accounts-receivable cycles’ – some pay a portion in advance, some pay on completion of orders and some others (like government agencies) have much longer payment cycles. However, even the seasoned entrepreneurs, those with the most robust cash-flow forecasts, were brought to their knees during this past pandemic year.
Most of the entrepreneurs who were looking to scale targeted venture capital for expansion, and did not look at working capital instruments – till the pandemic hit. The former, as experienced entrepreneurs know, is the most expensive to deploy for operational funding. Revenue, as the saying goes, is the best capital, but it was very hard to come by for most social enterprises when their customers were busy fighting their own ‘pandemic fires’. So, they all braced for low/nil revenues – some took pay-cuts, others leveraged personal credit, took debts from family, while some others switched off their car AC’s. Impact incubators and entrepreneur support organizations (ESO’s) advised them on various strategies to ‘continue, pivot or hold…’. But now, those SE’s that have weathered much of the storm face an even greater challenge – servicing orders they have painstakingly procured – without any cash cushion to speak of.
When these SE’s turn to main-stream banking institutions for ‘conventional’ debt, they are required to have a ‘solid credit history’. These SE’s have none – some have a potential order book at best. Villgro (and our many partner ESO’s) recognized this and started de-risked short-term credit instruments, so SE’s with little credit history and lending institutions sympathetic to this issue, can meet in the middle, so that debt can be provided and serviced. In our case, we leveraged support from The Lemelson Foundation and deployed a credit instrument in partnership with Caspian India [details here]. The intention is to kick-start the virtuous cycle of ‘debt -> revenue -> repayment -> credit-building -> better debt’. In our case, loans could be deployed to early-stage companies in our portfolio since our high-touch incubation de-risks them and also empowers them to service that debt well. Our hope is that as post-pandemic economic activity picks-up, these companies are able to spin-up the wheel of revenue and deliver sustained impact.
We believe that incubators looking at post-pandemic recovery and re-starting operations at their start-ups can perhaps focus on cash-flow analyses and working capital estimates. They should factor-in the various short-term debt instruments available – or start their own, where possible – and get the recovery wheel going. Our SE’s have a tough road ahead, but with some help in planning, they can scale-up operations this summer, and perhaps keep their AC’s on!