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Indonesia: Budget cuts, furloughs inevitable for start-ups to survive pandemic: Investors
Investors have advised start-ups to start cutting their budgets, furloughing some employees and even laying off others to survive the COVID-19 pandemic, which will likely hit the economy hard.
According to Dimitra Taslim, an investor at California-based venture capital company GGV Capital, start-ups could begin with slashing perks such as travel allowances and free food while opting for furloughs instead of a headcount reduction.
“Furloughing doesn’t always mean putting everyone on a leave of absence. It could mean putting employees on a three-day workweek and working less,” he said during a webinar on start-ups’ survival in 2020 on Wednesday.
The spread of COVID-19 has disrupted economic activity globally as the pneumonia-like illness infects people all around the world, hitting demand and putting a halt on various business sectors, such as tourism and manufacturing.
Indonesia is projected to see its economy grow by a sluggish 2.3 percent this year, the slowest since 1999, and even contract by 0.4 percent in the worst-case scenario, according to government data.
However, Taslim added that further budget cuts would depend on what sector the start-ups were in. For example, a start-up offering a human resource management software might want to cut its marketing and sales budget because other companies were placing their employees on leave or furloughing them.
A headcount reduction, he went on to say, should always be the last option in budget cuts. Furthermore, there should be a team consisting of the company’s CEO, CFO, head of human resources and a legal team to formulate the lay-off scenario.
Layoffs might be inevitable for some companies, especially when budget cuts are not sufficient to keep them afloat until at least mid-2022.
“I think if start-ups have a runway until June 2022, this can put them in a rather good position,” he said.
The start-ups should opt to raise funds from existing investors because venture capitalists (VCs) have raised their bar in accepting new portfolios, so start-ups looking for new investors should be prepared to accept a suboptimal deal, Taslim added.
He also advised expanding funding sources beyond venture capitalists, such as getting bank loans.
BRI Ventures CEO Nicko Widjaja expressed a similar view, saying a venture capitalist would be more cautious when looking at new investment opportunities but still want to do funding as usual.
“The venture capital funding trend is going down for new or early-stage investments,” he told the press on a different occasion on Wednesday. “However, unicorns are still getting funded. Venture capitalists would still continue to fund start-ups with a good track record.”
Meanwhile, Indonesian venture capital firm VC East Ventures cofounder and managing partner Willson Cuaca previously told The Jakarta Post his company would focus on helping start-ups in its portfolio and halt funding for new start-ups in the meantime.
A recent survey by the Mobile Marketing Association (MMA) and SurveySensum revealed that business players expect business situation to normalize within the next five months or around August.
The survey further stated that the COVID-19 pandemic had brought down the revenue of businesses, with 76 percent of respondents saying the pandemic had “severely disturbed the daily activities of businesses.”
Tourism and hospitality have been struggling because of the pandemic. Hotel chain RedDoorz is even working on a zero revenue assumption until next year while having to do major hiring and marketing costs.
RedDoorz CEO Amit Saberwal said the company had to let go of some employees in both its core and non-core markets, delaying its appraisal by three months and either putting other employees whose positions did not allow them to work from home on leave without pay or furloughing them with a small allowance.
“Reducing salaries and letting people go is all very painful to do and I think it’s difficult to cut costs without affecting the company’s morale,” he said on Wednesday.
However, he added that the period right after COVID-19 was a “good time” to be a start-up because there would be access to capital as well as an ecosystem that would support their business ideas.
Meanwhile, peer-to-peer (P2P) lending start-up UangTeman CEO Aidil Zulkifli said that while the company experienced a 30 to 40 percent increase in loan applications last month, it would want to be more prudent in approving them.
“We need to make sure our borrowers can pay back loans to their lenders or the lenders would lose their trust in us,” he told the Post recently, adding that the P2P lending platform would be cautious in funding businesses that required face-to-face interactions, such as restaurants and hospitality companies.
P2P lending is one of the sectors that are reportedly doing well and remaining optimistic during this pandemic, even though most of their borrowers are small and medium enterprises (SMEs), which are expected to be one of the hardest-hit businesses.
Source: https://www.thejakartapost.com/news/2020/04/13/budget-cuts-furloughs-inevitable-for-start-ups-to-survive-pandemic-investors.html