Three ways “hibernation” can help startups weather COVID-19

Long before COVID-19, hibernation was a deep sleep strategy where startups kept the lights on but spent as little cash as possible, cutting back fixed costs to extend their runways.

It was historically considered a risky strategy and often one of last resort.

Because if a startup doesn’t expect to see any revenue on the balance sheet for 12 months, is it really worth spending 12 times the monthly burn rate to then shut up shop in the end?

The world has now changed with COVID-19 and the Morrison government has unveiled its economic hibernation plan for businesses.

The ‘bigger than anything you’ve ever seen’ JobSeeker package involves providing eligible employers with $1,500 per fortnight per eligible employee.

Like so many global leaders, Prime Minister Scott Morrison is pulling every lever imaginable to ensure businesses are not saddled with debt they cannot manage and are able to return to normal when our economy has healed from COVID-19.

Independent of the measures from the Morrison government, there are a range of hibernation options that many businesses impacted by COVID-19 are already exploring.

Many founders have begun the task of extending their runway so they will have greater chance of winning at a later date.

When a startup hibernates, the process is a continuum with a number of possible avenues to slow down the cash burn and extend the runway, ideally so they have between 18 and 24 months.

Although this process is a continuum, here are the three levels of startup slumber.

Maintaining and sustaining

A founder who can confidently ride out a rough patch might choose to simply focus on the current business, shelving expansion plans and reallocating resources to projects with a better chance of immediate revenue.

They will continue to enhance their existing products, but new markets and products will be off-limits.

This is a BAU approach to maintaining the status quo with no new and sudden movements. Sales and marketing efforts for existing products will continue and staff may not even need to be stood down.

Founders would instead delay taking on the talent they need to drive new projects forward.

The founder, in this case, is focusing on adjustments to reduce costs and delaying any investment in activities that drive revenue in the medium term.

Lean but perfectly positioned

A founder may go a step further and reduce sales and marketing efforts for their existing product suite but continue with building out their product development roadmap.

The business services existing customers but focuses on developing functionality to switch on and integrate when the economy picks up.

The expectation is that maintaining a focus on product development will put the business in a much better position to sell enhanced products when the period of hibernation is over.

This may require standing down of commercial roles with the intention of reinstating these positions at a later date.

Standing down of roles sends a signal to the employee that they are valued and allows the employee to accrue certain entitlements such as annual leave.

Getting staff to agree to stand down may take persuasion by the founder and alternatives are often considered such as reduced hours. In an economic crisis caused by COVID-19, many will agree to reduce their working week, knowing that this underemployment is easier to recover from than unemployment.

Startup culture is often built around short-term sacrifice for long-term gain, with many employees deeply invested both emotionally and financially through measures such as employee share schemes that are linked to the future success of the business.

Lights on but minimal activity

The most extreme hibernation for founders is when the startup is effectively frozen in time. This means no new product development, no sales or marketing, and key roles are stood down. The business meets its tax and regulatory obligations, and may service existing customers but the headcount will only consist of the minimum number of people to main subsistence operations.

But which one?

The type of hibernation a founder chooses depends on the runway available and how much this can be adjusted by cutting costs.

If a very-early-stage business is on the cusp of securing funding and the rug is pulled as the economy nosedives, a complete hibernation may be the only viable option. The same goes for startups who are highly exposed to sectors such as hospitality, travel or tourism.

Investors will take a keen interest in the way that founders play the hand they are dealt in this downturn, the strategy they take, and the decisions they make.

This is often a time to build resilience and evaluate the business, test resourcefulness and build a stronger ship to withstand future storms.

If a startup can survive in a downturn with partial hibernation, then this is a sure sign that the startup will flourish in better times.

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