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Our lessons from the COVID crisis at Capillary

An abridged version of COVID Reflections — a three-part series by Aneesh Reddyco-founder of Capillary.

The Flipside of Turning Cash Positive

FY20 (April 2019 — March 2020) has been a monumental year for us. We went from a ~40% EBITDA loss/ Negative cash flows in Q4FY19 to our first ever EBITDA and Cash Positive Quarter in Q4FY20 (JFM). We were cash positive even after paying Venture debt principal and interest and working capital costs as well — cash positive to the dot.

And then the lockdowns started

Things were going well for us until the mid of March, and then Covid-19 happened and one country after another went into lockdown.

When you make a plan, you keep a 10% — 15% buffer to compensate for the misses and plan for that much extra cash. However, in the worst case when the 10% cash burn climbs to 75%, it spells disaster for the business.

For instance, if you had a runway of 12 months at 10% burn, you would have less than 2 months at 75% burn! (Looking back now, our cash flows in the 6 weeks from March 15th to May 1st fell by ~75%).

In moments of crisis, it’s important for businesses to assume the worst and take hard calls rather than hold onto false hopes.

A sure way to take a company down (besides running out of money), is to run out of energy. And one thing which would have definitely depleted energy and team morale is taking small cuts every week as bad news trickled in. We definitely didn’t want this to happen and hence decided to take the hard calls in one go.

Taking the Hard Calls

We got help from Saiki at xto10x to put together a worst-case plan to help us cut costs by a large percentage, so we could extend the runway to 3–4 quarters with our existing cash reserves.

  1. Take a sustainable ~25% salary cut, put a large percentage of the team on furlough/ leave without pay and take them back when things recovered
  2. Take the hard calls now — take salary cuts to a level that is reversible if business recovered to 75%+ levels, and get the rest of the savings from letting go of employees and vendors you couldn’t afford.
  1. If we had gone with Option 1 or 2, this delayed recovery would have resulted in a lot of employees going without pay or having deep pay cuts for an extended period of time without any clarity on when things will get back to normal.
  2. If we choose Option 3 and retrenched early, it would give our affected team members the highest chance to get placed in other companies and access to any remaining jobs, before other companies reacted and started laying off. I had a hunch that we could leverage the goodwill Capillary had in the B2B SaaS ecosystem and run a successful outplacement process to help the affected folks.

The retrenchment

Given the lockdown, we had to do the retrenching remotely through video calls. There was a lot playing on our minds. Most of the impacted folks would have been confined to their homes, nowhere to vent, no friends to meet, and face the discomfort of telling their parents or families that they were let go. We had to let go of quite a few folks — some of whom have been with us for more than 10 years — and we had to do this over a video call during a lockdown.

I would not have signed up to be a founder or starting up if I had the foreknowledge of a day where I’ll have to do something like this.

Those four weeks have been the hardest of my life, and I have woken up with nightmares on several days during that month. We decided to do this in the most humane way possible and leave no stone unturned in supporting the affected folks.

  1. We extended insurance till the end of H1 (September for everyone) and set aside INR 1Cr for any medical emergencies which the insurance might not fully cover.
  2. We brought on board YourDOST to coach the 30 teams that were going to run the exit process. The script for the exit meeting, the wording and the FAQs were closely scrutinized by them to make sure there was no word which was used that would make it harder for the impacted folks than it already was. YourDOST further trained the 30 teams on how to look for any clues of emotional vulnerability. We created a WhatsApp group where a panel member could send out a message if a conversation wasn’t going as expected and we would have the YourDOST team and someone from the senior management reach out to the employee immediately. The respective team manager would then be asked to keep in constant touch with these employees for the next few weeks, we also fast-tracked their outplacement.
  3. We further retained YourDOST to call up each impacted employee at least 2–3 times over the next few weeks. The impacted employees could reach out to the YourDOST team and get counselling sessions in case they were feeling low. A lot of impacted employees later wrote back to us acknowledging the support they got from YourDOST.

In times like these, it’s vital to be humane in your dealings, over-communicate, and do the right thing for everyone involved with your company.

Doing the Right Thing for All Stakeholders

Let me wrap this post up by sharing some of the things that leaders can do, to ensure everyone involved with the business is treated well.

Keeping your team going

It is important to have constant communication with the team and give them updates about the company and the overall business outlook.

Doing the right thing for your customers

We offered a 4-week fee waiver spread over the year to all customers who were impacted by the lockdowns. We have spoken to every customer at least twice a month, shared data on our learnings from China and built a WhatApp CRM-Commerce product similar to WeChat CRM-Commerce that worked in China even during the lockdown.

Treating vendors well

When the crisis started in March, our first response was to hold back payments and we did; it’s not something I am happy about but I don’t think we had an option. In April we prioritized clearing the payments for all our smaller vendors. The larger vendors were paid in May and June as our cash flows improved and the funding also came in.

The worst thing to do is give wrong payment dates and upset their cash flow planning or worse, just avoid taking their calls.

Where are we now?

It’s been good to see things coming back to normal. On average, most of our customers are at ~50% YoY, our Chinese customers are at 95%+ YoY. While the data is optimistic, I still believe that the new normal on an average across Asia is probably going to be 85%.

One post facto realization — it’s better to take the hard calls early and prepare for a worst-case scenario in unpredictable times, rather than living in constant stress and uncertainty and reacting to every negative news.

I feel you think with more clarity when you have a reset and not stressed about every negative trend that comes out. I think we moved fast and moved hard and it helped us to channelize our efforts in doing the best we could for our past and current employees as well as our customers.