How startups and investors can survive financially in any crisis

The Covid-19 outbreak, coupled with the oil shock has as of today resulted in a paralyzed, shell-shocked West and a winded East.

What I have learned going through the 2000 tech crash, 2003 SARS pandemic, and 2008 global financial crisis is that pendulums tend to swing to the extreme when aided by self-reinforcing fears and panic. This does not mean that we should be cavalier about things and just work on a best-case recovery assumption. Rather, it means we must recognize that this crisis, while large, is not a world-changer in any meaningful way.

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Yes, inept government officials may be voted out, people/companies will continue to go bankrupt, and, unfortunately, a lot of people will continue to die from the virus. But this will not change the world in the same way that democracy, religion, or even the internet did.

So what should we do as investors and startup founders?

For investors

First, investors should take it slow and easy and have a plan as the market gyrates. Cash is king, so invest how you see fit: Some people buy the way down, some buy the way up. But what is most important is not to over-leverage. Never put yourself in a situation where you have to sell a financial asset due to margin calls or daily expenses. For our situation, we have a hard cap of 28% on total leverage on all assets; you need to figure out yours.

Second, keep to your asset allocation. A balanced or conservative portfolio would actually have seen only a 3% to 10% drop year to date – that’s just part of last year’s gains. Compare this to stock market drops of 25% and some individual stock drops of 50% to 80%.

Third, keep diversifying and don’t own too much of one counter or industry. For me, this means you shouldn’t take a single stock risk of more than 5% of your portfolio. Personally, I am prepared to buy five times of exchange-traded funds, dividend stocks, and technology stocks from the S&P 500 all the way from 3,000 to 1,200, and the Straits Times Index at 1,200.

This is below the levels of the global financial crisis substantially and, at that level, will involve some careful leveraging (30% maximum) and selling of bonds. It also involves being much pickier. Why buy stocks of speculative loss-making tech, like Eventbrite or Zendesk, when you can buy Apple, Alibaba, Facebook, Google, or Amazon stock at super discounted prices? This means that at the current S&P 500 level, we have action plans for markets falling much further.

As for private equity investments like startups or venture capital funds, we have always espoused keeping to just 5% to 10% of net worth and putting them at book value. So these should continue, though maybe at a slower and more careful pace.

If you are investing in early-stage startups, I would argue that valuations will get better, and you can find quality founders in times of crisis. No “wantrepreneur” would run a startup during bad times!

For startups

Startups are in a much tougher situation.

A few will be lucky to have huge demand due to the sector they’re in (healthcare, delivery, cleaning services, etc.), but most will be in a reverse situation.

The most important thing I can share is to take action and take control of your destiny. Don’t hide, be passive, or be in denial. You need to act on revenue, cost, and cash flow to get past this period.

Cutting costs

On the revenue side