This is how Startups Attempt to Maintain Liquidity
Cash is the king… now more than ever. After many years of record investment and abundance, the Spanish startup and technology sector is facing its major challenge in the last 10 years. A challenge in the form of a global pandemic, the coronavirus crisis, that has shut down the economy and threatens to seriously affect investment as well. Spanish companies are attempting to maximize their cash reserves and their financing due to this “impasse”, to avoid the bankruptcy. Some companies such as the two big unicorns, Cabify and Glovo, are making hard labour adjustments and others are attempting to avoid some expenses in order to survive amid this situation.
In order to measure he overall impact, it has to be analysed how this happened in the first place. Startups and technology companies have been in at ease during many years. Not only because of growth as a sector, both in number of companies and in size, but also because of the investment that is have been made by Spanish and international venture capital funds to make these projects grow. In 2019 alone, €737 million were injected into local companies, according to the data provided by the employers’ association. In the last five years, Spanish or home-based firms have been sold for more than 2 billion, with giants like AT&T or Ebay taking out their money and paying out hundreds of millions.
2020 was expected to be a conservative year regarding investments. After a long time prioritizing growth at all costs, the WeWork or Uber blows on the stock market pointed to a more restrained exercise. And, above all, a new time more focused on profitability and positive cash flow. But no one could have imagined in January that the coronavirus pandemic would have a major impact on the global economy and affect so many countries. This tsunami has led to a collapse in incomes due to severe restrictions on mobility and consumption as a result of the measures adopted in most territories.
An impact that has also affected this sector and has become the first headache for these companies. “I’m worried about the demand for products and how long we can survive with hardly any income; the bomb has not fallen on the startups but the shock wave will surely affect us,” explains Luis Martín Cabiedes, co-founder of Cabiedes&Partners.
This lack of demand, not only among families – affected by layoffs or job cuts – but also among companies, is the great concern. In this scenario, the most affected, as it happens among large companies, are located in the travel, leisure, tourism or mobility industry. On the other hand, there are others, there are companies less affected by this situation, such companies benefit from the forced digitalization of companies or the online purchases of basic products during the lockdown.
Due to this collapse in income during the last two weeks, the headquarters of the main Spanish startups have put on the table contingency plans with a unique objective: to ensure that the cash flow will lasts. ”If you want to get to the other side of the bridge you must make sure there is enough liquidity; the entrepreneur must picture himself in the worst case scenario,” says Iñaki Berenguer, founder of Coverwallet, a company sold just before this crisis to the giant AOn for several hundred million euros. Making the liquidity lasts, is key. ”Access to international capital is going to be frozen by at least July, so those who were waiting to raise money from outside have to do everything they can to have their runway stretched.”
Even those companies that had just closed a round a few months ago or, even during the pandemic, need to make that money last. Glovo raised 150 million in December, while others like Byhours or Spotahome ensured some oxygen. ”The companies that have been lucky enough to raise money just before the pandemic, will have it easier,” explains Iñaki Arrola, co-founder of the K Fund.
However, even having that number of euros doesn’t guarantee them anything. Companies with 5 or even 10 million in cash are being told by their shareholders to stretch the maximum with adjustment measures, in order to ensure that over the next 12 months they have the means to continue operating.
Spanish Temporary Redundancy Plan (ERTE) in the Sector
Among the extraordinary measures adopted, as it has happened in large companies and other ‘traditional’ SMEs, the startups have employed the Temporary Redundancy Plan (ERTE, by its Spanish acronym). In fact, the two emblematic unicorns in Spain, Glovo and Cabify, valued at over €1B, have presented an ERTE. Glovo has just done it for 38% of its staff in Barcelona (340 employees). Cabify, for 450 employees. Both companies say the decline in activity in their respective businesses is the main reason for taking this measure. Neither Glovo nor Cabify are exceptions.
Many other startups already have that ERTE on the table or have already submitted and approved it. But these are not the only measures the entrepreneur can employ during this extraordinary situation. David Bonilla, founder of the technical staff recruitment company Manfred, points out other options: forced holidays during this period or direct salary reductions for the staff and the management team. He insists that in order to take these measures, the company had to have earned its trust beforehand. “If you’ve done your homework before, your team will be more willing to make a sacrifice to keep it,” he says. He insists that there are companies that continue to hire and proof of this is that Manfred continues to send five job offers to its Telegram channel, where it has 7,800 subscribers.
Amid this massive layoffs or redundancies, Bonilla acknowledges that there will be losses and that salaries – which grew significantly in boom years – will also suffer. “There are many people who want the market for technical talent to be fucked,” says the founder. He acknowledges that the sector will be regulated, but also reminds that the demand for technical staff will remain high after the first wave of this crisis. “The world will be more connected, more computerised after all this, and I predict that September will be a very hot month,” he says.
Aid for the sector?
Despite being a relatively small sector and having less specific weight in the Spanish economy, some voices point the need for more specific public aid for the sector and for these types of companies. It is significant that the two public emblems, Enisa and CDTI, are currently shut down due to the lack of funds or problems in signing new operations caused by the restrictions of the Spanish Government. What have other countries done? France and Germany have already announced specific programs to give liquidity to these companies – tax refunds or tax credits along with short-term refinancing – and also to the funds. Between the two of them they amount more than €6B
Some of the Spanish funds assure that they will maintain their investment profile. “In these crises the best years arrive, not because you can buy them cheaply but because the entrepreneur is more aware and is not going to throw away the money from the rounds,” points out Iñaki Arrola. Regarding Cabiedes, he recalls something: many funds have money in their portfolios to spend. ”And if we don’t have it, there is going to be liquidity in the market; financing is not going to be the problem,” he defends. Aquilino Peña, founder of the Kibo Ventures fund, acknowledges that there will be a major slowdown but that they will continue to analyse opportunities.
Either way, it is clear that there will be a lot of corporate movement in the coming months through M&A, to try to ease the situation. Movements in services such as food service, where a new phase of consolidation was still pending, or in transport. All the sources consulted by La Información assure it will be that way, so the measure proposed by the Government to reserve the capacity to veto foreign investments from outside the European Union in Spanish companies may represent a significant brake.
The most difficult time for the technology sector comes now. Local funds are assuming that there will be less people in their portfolios, although they will try to reduce that number as much as possible. As Iñaki Berenguer says: “This is a real situation for our sector and it will serve to see whether or not the Emperor goes naked – as in Hans Christian Andersen’s tale – and who can survive this situation a little longer”.
Sources: Empresas, El Periódico