Exit Strategy for Startups

Rajinder:

Rajat, Gourav, Sanjot, Avi, thanks for doing this. Everyone's last few weeks have been really busy and we've been all talking to founders that we work with closely. And you know, there's a lot that we are learning from the ecosystem. We've also been sharing some of those learnings with folks on Matrix Moments. I think for this podcast what we thought would be useful was really focusing on the last weeks’ worth of conversations across founders to really distill more forward-looking insights. This is more of a compendium of sorts. So really things that we're learning across sectors with the most strategic view of post lock down how the world would likely look like. I'm going to start with just a basic question. What have been each of your biggest takeaways from last week's conversations across the portfolio and the network?

Avnish:

I'll take a macro shot at it. I would say sadly, I've seen a number of crises including living through on the entrepreneurial side with our founders. And I would say this is the most resilient and the most objective that I have seen the founder community. The founder community. You know sometimes one feels “I wish this didn't happen to me” there’s none of that, so there's a more emotional reaction and none of us have seen a crisis of this magnitude. So to see the kind of reaction very proactively from the founder community has been very inspiring because they are the ones facing it, we can all sit here and give “Gyaani” sessions, but they are the ones feeling the daily pain. So it's been amazing to see that, which has translated into important actions, which I'm sure GB, Rajat, and Sanjot will cover for each of the sectors. But the ease with which that has happened, the fact that it is obvious that certain things have to be done and that people have that fighting spirit of we'll get through this and we’ll get through this together and we can get on the other side has been quite a pleasure to see.

The second thing, which I haven't seen in the past is when you get hit by something like this, you are automatically on the defense, right? Survive kaise karein, How do we do that? What is the survival trick? Very early on there was thinking around defense and offense, how is this an opportunity? How do we make this into an opportunity? we have all spoken about it and it's been written about – we had Jio inflection. Then we had digital usage, internet inflection, which I think was 18 and 19. And this may be the moment that, because all of that was ready, you know, you may see a lot of these businesses take advantage and some of them like are tech-heavy obviously. But that's kind of the macro views. It's been interesting to see.

Gourav:

Why don't I take a crack first? So I focus a lot on retail businesses and E-commerce and market placements. I'd say the biggest learning from the last few weeks. Unfortunately, it's a stark difference between the have’s and the have nots. There is a category of essentials and there are companies that do essentials, the good news over there at least for the essentials categories is that the supply chain so far has held up. There's been enough slack and what we see is that supplier disruption is not that deep. The issue is fulfillment. Right? And you know, all of us know about orders not getting delivered.

I think that's the biggest problem that most of these companies are facing.

Unfortunately on the non-essentials side, the issues are a little bit deeper because not only are these companies not able to service the demand from what we're seeing in terms of the US and China demand is likely to be ­­­broken even once we get out of the lockdown. I think that's a deeper set of issues that these companies need to solve. The good news of course as Avi said is that, the resilience factor has really come to the core from bunch of these founders, whether it's in terms of new categories, new distribution models, business models.

Rajat:

I focus on financial services and education as well, like Avnish said education is one sector. This is truly its their day under the sun. And we see a lot of increase in demand for most segments, not all but most segments. Financial services and especially lending is obviously very badly affected and a lot of effort over the last few weeks has been spent by different companies to try and come to terms with that and figure out defense strategies.

Largely for me, two things truly stood out over the last few weeks. One that, lending is no longer, at least in this time, it’s no longer a balance sheet business, but it's really a cash flow business of where it is imperative for companies to match incoming and outgoing cash flows. So what does that really mean? Rather than focusing on costs and collections, which everyone's already done, it also means take a very, very hard look at supply. And that's been a big problem right now for all lending companies with modems. It's not easily available. But I don't think enough steps have been taken so far, including a restructuring of loans if required. Selling portfolio, if you can and bring whatever it takes to survive first and then thrive. And I guess the next few weeks are going to be critical for these lenders to try and manage that.

The second point is around the risk model. Despite whatever we say there is an over reliance on credit bureau and credit scores that we see across the industry. And that just doesn't make sense anymore because the credit scores don't take into account the future dashboards and erstwhile safe segments are not going to be safe anymore. What do you really do when salaried employees of blue chip companies are being laid off? How do you lend to them? So companies need to take a very hard look at risk. Those are the two big takeaways for me.

Sanjot:

So I look at consumer and consumer tech. So let me start with consumer, which is more consumer product and customer brands. I think this crisis to Avi’s point has been unique in two ways. It's not just an economic crisis, I think it's much more fundamental, much more of a human crisis. What that means is one, overnight these businesses, no matter who you are in the consumer products, you kind of went from a hundred to zero and therefore there is a risk mitigation aspect of just survival.

And then number two, I think we're seeing a lot of realignment of human behavior, a lot of changes in how we spend our money and our time and therefore the product market fit, which seemed to exist before may not exist afterwards. On the first part, I think it's a lot to do just about cash flow management, having enough cash in the bank to survive and see it through this crisis. So I think a lot of companies as a step one when they went to zero after this, during the initial lockdown they were thinking about conserving cash, extending your runways for the foreseeable future ideally a year, that meant relooking at fixed costs with a fresh lens, variable costs, working capital and so on.

I think to add to GB’s point where the distinction came in was between essentials and non-essentials. I think essentials are much better positioned and in some ways are almost the tailwinds. So these are your pharmaceuticals, staples, groceries, and so on. Especially where there are two factors is kind of what I've realized over the last week. I think if you are very, very tech enabled or technology-enabled essentials where you're going direct to consumer, you have a tech enabled delivery aspect, I think you can come out of this much stronger. And also wherever you have tailwinds of health and wellness. Because I think the other thing that this crisis has done is its forced people to adopt that change of thinking about the health and wellness much more. I think for the non-essentials it's actually a little bit of a tougher scenario because a lot of companies need to rethink what their position might be in the new world. So it's a lot about survival in preparing for the new world. I think conserve cash to survive and prepare by sharpening the blade. You know, it could be thinking about what your customer needs are going to be in the new world and we are adapting to meet that need.

I also look at media and gaming, so I will specifically talk about gaming. I think that's the one sector among most that's really shot up. These numbers are very, very preliminary. But from what we understand, I think the average time spent on a phone was about three hours a day before and has gone up to five-six hours a day, there's been a 40% surge in downloads and gaming. There's been a 21% increase in engagement from gaming and it's not just engagement based actually spends have gone up in gamingwhich is almost counter intuitive in a crisis. So I think there is some opportunity in pure play media and gaming businesses, but we can talk a little bit more about that later.

Rajinder:

I'll add a little bit on mobility. At least some of the younger companies that are also thinking through how to reimagine their PMF post this crisis. And one thing that's clearly coming through on the defense side is a big focus on health and sanitization. So I think there will be an increased focus in the mobility sector around it. I think on the offence side, actually there's a lot of encouraging thought because you know, in some ways there's an opportunity to gain market share relative to other modes of mobility and other players in the market who aren't as focused on health and sanitization.

And then the second thing is I think supply was always a constraint in this market and while there may be some impact on demand the truth is the country that really is able to retain high quality suppliers is one that will succeed in the long run. And so anything that these platforms are able to do to augment supply and to augment driver incomes, as partner incomes is really key. And I think Gourav you were mentioning that e-commerce as an industry is facing shortages with respect to fulfillment in some sectors. I see some delivery companies actually thinking more seriously about how they can play a role in augmenting in our delivery capacity in metros at least. So I think net-net, I think reimagining the PMF and a much tighter control on supply. So encouraged to see a lot of the defensive and offensive thinking across the portfolio.

Rajinder:

I'm going to switch to the second question we were talking about the other day. I think we have some sense of how the government is thinking about the exit strategy. There's talk of, green zones and red zones, et cetera. What about for businesses? I mean each of the startups of businesses that you'll have been speaking with, how are they thinking about the exit strategy at a very high level and can they really return to whatever version of the new business as usual is, seamlessly once the lockdown is lifted?

Avnish:

I think just on this Rajinder, one thing that I'm advising founders is before we get down to the tactical exit strategy, on the defense if people have really thought through whether they're PMF held or not. Normally, when you attack a market, we talk about the thin edge of the wedge, how do you go into the market, in a post COVID-19 world the market is different across sectors so is there a new thin edge of the wedge that you have already that will get you there? An example could be,we have a men's brand company called Damensch, should they be making masks because likely masks would be required everywhere right? So some of this plays to the strength or the offense, but I think as part of exit, focusing on taking a real hard lookat – was the PMFworking. Is that the best PMF out of the gate or is there something else? It's something to think about.

For example, you've seen Ola talk about providing cars for medical visits right now in the Covid world but in the post-Covid world also the most sanitized hospital visits, getting that comfort, that is the thin edge of the wedge, right? So, that's one point. Second macro before I turn it over to these guys is my view is earlier we had discussed V-shaped, we were wrong, Well actually we never said it will be V shape, we had discussed U- shape and L-shape, right? V-shape, we thought if things shut down very deeply for a short period of time, they will rebound very strongly. I still believe they might rebound very strongly. But two things have changed for me. One is, and I know you'll talk about China, I think it'll be very different by sectors. And second, I am increasingly very wary of repeated infections and I worry more about not just W curve but a repeat of W so a zigzag recovery. So I think the founders should be prepared as they're planning their exit strategy that is not going to be fully on. We want to come on in phases, be prepared that things might go off again and then you have to come on and that will also be by geography. I think planning and thinking through that for the next six months or even a year is important because if we are wrong, that's great. If we're right, then you don't want to be in a situation where you've come full guns blazing and then suddenly you're struggling with that stop-start-stop-start. because you're not prepared for it, can be very tough

Gourav:

Look I would say you know, specific to sort of commerce and marketplaces and I'll use the same framework, which is essentially non-essential. I think essentially, it's relatively simpler because honestly the focus for most companies is to build redundancy in their logistics layers because at this point of time, demand by far exceeds fulfillment capacity.

I think what we'll see is that a lot of supply is soon consumed by a lot of these new players, right? For instance, we're already seeing efforts in sourcing directly from farmers then giving to Kirana stores. We have seen a lot of intermediaries taken out of these supply chains. But the caveat here is I think all of this is subject to supply holding up. I think there are big macro factors on supply for instance, the monsoon, for instance the mass migration that we've seen from urban areas to rural areas and we don't know what impact that has on the harvesting season. And those are all watch outs for founders. But I think the main focus immediately after the lockdown would be on redundancy and fulfilment.

But for essential, honestly, it's less clear. Already we're seeing large demand stimulation exercises being planned by the likes of Flipkart and Amazon that has planned sale events immediately post lockdown. I do think it'd be a combination of demand stimulation, but people need to accept that demand at least for the next 12 to 18 months would be part of 50% lower in most categories than what it was earlier. So, it's a combination of, going in, looking at new opportunities, perhaps rediscovering PMF within small subcategories of the large, the categories of earlier part of but it's not an easy answer unfortunately.

Rajat:

From a financial services perspective I think how companies are thinking about emerging out of thisone is we've already spoken about the need to reassess and reprice list. The second part is what we’re seeing across the board is there is a onetime shift to digital that is happening in every segment, right? So, whether it's doctors, teachers, students, professionals, mass adoption or trial of digital in some shape or form is happening. And that's going to have a ripple effect in financial services right. So companies are trying to now reorient themselves from erstwhile offline focused or non-digital models to much more digital-first lending or insurance or any of those models, because suddenly your cost of acquisition is going to go down and you can potentially build much, much more robust and steady businesses.

The second or third thing on this is what companies are trying to do is be less balance sheet heavy and look to do more co-lending because banks will have the cash and companies may not and it just limits the risk and gives you a lot more flexibility to be a lot more nimble about things.

Lastly, which is a little bit more tactical is as you know, this moratorium period gets over and, in some sectors, 20%, 30, 40%, people would have taken moratoriums. The load on collections systems will be immense once the moratoriums period gets over. So, companies do need to bolster their collection systems, maybe retrain existing salespeople, existing credit people to do collections in this time. And especially if this, you know, W type of recovery or zigzag curve keeps happening companies do need to prepare and maybe multitask or multi-train to be able to manage these ups and downs without really getting your cost structure haywire.

Sanjot:

From a consumer perspective, I think I'll talk about it from two aspects. One is the business aspect and the other is the people aspect. I think from a business aspect it's about controlling what's in your hand and minimizing risk in terms of what's not in your hand. So what I mean by that is what's controllable is your production and your marketing and what's not controllable is how the government behaves, for example, or how the disease spreads or how fulfillment happens, right? If it's third party logistics.

So on what's controllable, I think it's very, very important to kind of tiptoe back into growth. It could be, it goes up the earlier point that I made thatcash is king more so in this environment, so you only want to produce as much as you can fulfill. You only want to produce as much ideally as much there is organic demand for, and therefore you don't want to always spend on marketing in this environment unless you feel there is pent up demand for your segment.

So be very careful. Fulfill your promise to the customer and do only as much as you think you can deliver with a 100%. And then on the uncontrollable, thinking about what you can’t control and minimizing risk there - fulfillment is one aspect, where if you’re working with a third-party logistics, delivering to pin codes only they are servicing at that point or liaising with the local government, policy decisions happen at a central level, execution happens at a local level.

And then on the people front and I can’t emphasize this enough, especially for the consumer brand, I think safety and security both for your customer and your employees is paramount it means that you are taking extra precautions. For example, a bunch of our companies have constant sanitization at, all their factories, single-file entry, a separate exit and entry doors for people. Some co-founders actually aren't even coming to office at the same time so that they don't overlap, employee insurance and, uncompromisable quality to the customer because this is really when trust matters. And finally communicating. I think communicating is very, very important coming out of this crisis both internally and externally.

Avnish:

Rajinder I know you’ve got some stuff on China and you probably want to talk about something related to mobility. I think as an underlying principle of the exit strategy is, what is the goal? The goal is how do you not start with zero and be as close to possible as you were. So I would really think about what can I do such that I can get 30, 40, 50, 60% of my business back on day one. And of course, it varies by sector, but I know it applies in mobility as well. But second, how do I navigate the likely zigzag. Those are the two things and whether it is where will you keep warehouses for consumer brands and stuff like that. RBS do you want to cover that China learnings on mobility?

Rajinder:

Yes. I think that like in many things we do learn a lot from China on how things are going to play out. Some of the data that we are seeing from China actually is helpful. So, what we're hearing from colleagues there and reports that we're reading is that 90% of people are back to work and definitely heading out for essential shopping, linked to that many people obviously are using shared mobility solutions. Only 65% of people, however, have visited a shopping mall and only 35% of people have visited a restaurant. And only 30-35% of people intend to travel with a hotel stay combined over the next few months. So some sectors are more impacted than others. And then finally on the supply side, issues related to delivery is one part of it, like delivery professionals not showing up. Another part of it is just the ability to complete deliveries without issues. And that number supposedly was only 43% of deliveries that were completed without any issues in the last week. But that same number was about 18% for weeks. It was only 18% of deliveries were able to be fulfilled without issues four weeks ago. So obviously that would have been some impact on, e-commerce overall. And, we just see the impact on other industries as a result, travels is down by 60 to 70%, metro usage is down by 40, 50%. E-Commerce is slightly down, some sectors more impacted than the others. Offline retail is also 20% down.

Food aggregators are seeing actually a modest lift, maybe 5-10% lift, but the China context maybeslightly different - online education like Rajat was saying, has actually seen, 1.5x or 3x on DAU two months out or three months out. And in the peak of the crisis there actually they were seeing 3-6x on DAU.

For FinTech in the month of Februarythere was about a 40% rise in delinquency levels, but I think that's eased out as March and April have progressed. So I think there's a lot of data that's coming through from China, which I think founders in India are also looking for. I think there's a lot we can learn and honestly I’m going to close by asking the last question, which is what data are you’ll watching? What data do you think founders should watch? To navigate the kind of zigzag as Avi said.

Avnish:

Sorry Rajinder, just to clarify. So what is the takeaway from the China data? what is the net net?

Rajinder:

I think the net-net is that once the lockdown lifts, I think people are going to go back to work. And with that, there is going to be some sectors like mobility which will bounce back. But on discretionary spending, which is you know, things like going to a shopping mall, restaurants, some of these categories the bounce back is going to take more time. Travel is again more than the discretionary bucket. So, I would say, similar to the themes that we spoke of earlier, but kind of across categories, education, really not discretionary and clear need for students to study.

Avnish:

We'll come back as the optimism, but we have to be cautious. And we have to remember that China did one province, only one city was locked down the way India is locked down. And one province was locked down at some version of what India is doing and the length for India is much longer, so it may take a bit longer. They didn't have issues in the supply chains, they had migrant labor issues, but because of lunar new year, Chinese new year, not because of this. Right. So I think this may take some time to come back, but again I think the minute the lockdown lifts nationally, there will be a week of euphoria and things will go like “this” (an upward movement) and then there will be something that comes up about some province or some states where cases have spiked up and things will go down. We should just be prepared for that. But I think the overall data from China is that this will take time for some of these things to come back. Coming to what data to watch. I'll give my thoughts and also on opportunities and then we can close with everybody's sectoral views.

So the red, green, blue, the government has spoken about - that data is very easy. You don't you, if you don't have any cases, you'd be in green and then graduate to red depending on the number of cases. I think the fact that it's available on an app gives us a great tool. I know there are privacy concerns. All of us have. I think it's a great tool for almost a mapping of the country and knowing what is going to happen where. The data I would watch is, I think there will be a euphoric pent up demand spin, I would watch data two, three, four weeks after a lockdown ends. To figure out the pace of how the bounce back has happened and if there is a spike in infections one should just assume this zigzag trajectory for some period of time, which by the way, now they are even talking about in developed markets that this may go until 2020 - net-net this will go on until a vaccine comes. That's the reality. We need to suck it up and need to plan for it, but that's what I would think about. I really believe in the opportunity side of it. Everybody's market share is zero. That means nobody's a leader. That means nobody's a follower. The incumbent is no longer the incumbent. The challenger is no longer the challenger. I think the best companies will take that approach and they will find that thin edge of the wedge so to say, how do I take disproportionate market share while being cautious when things come out of this and what is that COVID view or just the basic thing that we've all spoken about - that digital is now going to be the next big thing. Overall I think that’s what I would watch for from a macro view.

Rajat:

I can build on what Avnish just said that relative market share will go to zero after this crisis. And in financial services we saw that after the 2008 crisis also where pre-2008 ICICIbank used to be a very large unsecured lender. Perhaps the number one in the country in the private bank space, but significantly contracted after the 2008 crisis. They just decided not to issue new cards, go very slow on personal loans and that created an opportunity for a bank like HDFC to really come out and build a very, very large and profitable consumer unsecured lending franchise. I think similar opportunities will exist for a smaller company as where you will see a time with lower competition. The coming few months and strong companies should figure out a way to capitalize on it, right. At the same time lending is risky. I think we've not seen the data on job losses or true impact businesses just yet. So I would be cautious about how I build this out, but it's the best for entrepreneurs. I think we'll be able to manage with one leg in each boat and managing it through this crisis.

Gourav:

I would say well for commerce and retail in three pieces of data are super, super important. I think one is, as Avnish spoke about there is, you know, red, green, blue, and so it becomes even more important than commerce because essentially we have had mass migration and they could be factory workers, delivery personnel who are unwilling or unable to come from you know a green zone back to a red zone.I think it'd be very important to see how some of those effects play out, especially in terms of manpower. I think the second thing is that we will see a lot of categories or subcategories within large categories that actually see differences in demand pickup. For example, at least the early data that we're seeing is a derivative category like office wear or tablet accessories are probably going to be a much more neutral, compared to broad categories. And then the third thing is as Rajat mentioned, right, so credit is the lifeblood of commerce as well, and it will be very important to look at what the second and third-order effects of credit in the supply chains and how they play out. But I do think supply chains will be completely disrupted. In terms of opportunity, I think one point Avnish already spoke about because everybody starts at zero, so market share becomes irrelevant. ­­ I think number two is at a global scale what we're seeing is that supply and manufacturing are going to get increasingly decentralized and people are going to worry a lot about concentration risk and therefore start moving manufacturing out of countries. I think that's a very large opportunity for Indian manufacturers as well as derivative commerce businesses. I think that’s definitely a trend to watch out for.

Sanjot:

At a very philosophical level, I personally believe that the way we behave will change more prominently than we think. I think no matter what the recovery time might be, whether it's one year, two years, three years, whenever the vaccine or the therapy arrives, I think it would have left an indelible mark on how consumers behave and therefore spend. So from a consumer perspective, I think therein lies the challenge and the opportunity. So for the first time because of the zero market share issue, I think being the largest is no longer an advantage, being nimble is and what that means from a consumer company perspective is a few things. One is the ability to really stay in touch with your consumer. So I would encourage founders to talk to the consumer more so than ever, especially if there's downtime for them.

Really trying to anticipate how their needs and behaviors are changing because that is what will drive your future PMF. Number two, take the time to tweak business models. I think this is a time when consumers are most likely to adapt to change. And there are very few moments in life where people are so easily adapting to change. You can see your parents, grandparents downloading apps, being online, having subscription services, which was never the case in a country like India especially. So those business models that one has always been trying to do I think now is the time to do it. Number three, I think creating long-term content and brand. You know, advertising is ephemeral, brand is permanent. So using this time to build brand especially staying connected to your consumer. And then finally I think using this time to both do product R&D connected to what you're learning from the consumer, developing better-improved products, whether it's for health or wellness, whatever the tailwinds may be, and also supplementing your team. Right? I think unfortunately as a consequence of this crisis, a lot of folks have lost employment, which means there's a lot of good people looking for jobs. So if you are fortunate enough to see the opportunity in your business, I think now is the time to build your team as well. I think it's about observing, adapting and executing on that as quickly as possible.

Rajinder:

Thanks. Thanks, everyone. I think a lot of good advice for managing through this uncertainty. I don't know if anyone has any closing thoughts…

Avnish:

I have a closing comment - so I was on this kind of a session with somebody very senior and somebody I respect who had a very positive spin, spin maybe the wrong word, but it sounded like a spin on this whole situation for India and the thought is the following - the thought is that every, first of all, we have to all agree that this is a crisis of a very large proportion and people have compared it to World War II as opposed to The Great Recession. So if it is a crisis of a very large proportion, all crisis’s of very large proportions have actually re-done and re-wired the world order and specifically World War Two, the whole industrialization because of World War II, America, Germany then Japan, one could argue that The Great Recession gave China and the US the most tailwind. And the hope is that this is the one which is for us, for India. And I think we are just in the right place at the right time in a very bad way. But coming out of it, this will be out time, this will be our moment for the next decade. So that's it.

Rajinder:

Thanks, everyone. Thank you.

Reading Material:

1.Best Practices for Founders in the wake of COVID-19

2.COVID-19, India perspective 3.0

3.Bernstein China Covid 19 tracker: How quickly is China getting back to work?