2020 is only in its third month and it’s already been a wild ride. Before the Coronavirus outbreak spread beyond China, the capital markets were already difficult for startups in the earlier stages. Valuations were sky-high – perhaps too high – and VCs and investors were looking for huge returns, regardless of intrinsic value. It was reminiscent of 1999. Cutting costs was already in the cards for some startups in the difficult fundraising environment.

Then Coronavirus struck, quickly spinning out of control and grinding the global economy to a halt. The oil price war between Russia and Saudi Arabia, waged during plummeting demand, drove further market nervousness. The relentless cascade of travel restrictions, closed borders, shuttered businesses and schools, and a buying panic in some areas eventually manifested in a roaring bear market, wiping out 25% to 40% of major indices. 

Times are tough for equities, but currencies have also experienced price swings. The big story is the GBPUSD pair, which crashed a whopping 11% to 1.15, a massive drop for a major currency pair and equated to a “hard Brexit equilibrium”. In part driven by fearful flight to safe haven-USD plus a longer-term issue with how Brexit will proceed in these uncertain times, there is significant pressure on the GBPUSD pair. 

The coming recession will force many more companies to cut costs, often in the form of job losses. Those individuals losing their jobs at the start of a recession are in very disadvantageous positions, because hiring may be weak for months as unemployment rates spike. It is for that reason that we at CityFALCON have created a plan to cut costs while simultaneously preserving jobs at the company.

 

Investment, revenue, cost, and currencies

We recently closed a fundraising round at about £525K; a fortunate result as the closing date coincided with mounting coronavirus fears. We believe that our relations with investors and our very strong track record of transparency led to more than half a million pounds of investment, even in a time of growing global concern.

However, with the sudden, unexpected halt in the flows of the world economy, many businesses are struggling with revenue and looking for places to cut costs. While those involved in the financial world need relevant data now more than ever, even as a strong data delivery and analytics platform, we expect to see a temporary decrease in interest for our product as enterprise clients try to conserve cash and retail users are hesitant to commit to subscriptions just before a potentially deep recession.

Furthermore, we keep our company accounts in GBP, raise money in GBP, and generate a significant portion of our revenue in GBP. However, with offices in Malta and Ukraine and high USD-based technology costs, most of our costs are paid in USD. The precipitous drop in the British Pound has caused our costs to increase unexpectedly at a time when interest in the product from new clients may temporarily wane, leading to lower incremental revenue. To prevent operations issues in future, we are seeking cost cutting measures.

 

How to cut costs at a lean company

We pride ourselves on practising lean cash management, and this means we already maintain a low cost profile. One aim of our company is to automate much of the pipeline for financial content aggregation, processing, and delivery in order to reduce costs for clients. We have thus far been successful in automating a lot of the processes, and this allows us to keep costs low. As a startup still in the early stages of acquiring customers, we also always look for ways to cut unnecessary costs related to technology, hardware, and operations.

However, building a company requires a strong team, and as the company and product expanded, so too did the need to hire more people. At this point in time, most of our costs go to personnel involved in development, design, and product management work. Since our costs in other areas have been trimmed to be as lean as possible, we cannot cut costs in operations, hardware, or processing, because the product would not be sufficient for sale anymore. 

Unfortunately, this means the only place we can cut costs is through personnel layoffs. Even worse, we expect a strong recession as the economy shudders from enforced quarantines due to the pandemic and the subsequent fallout for companies carrying historically-high corporate debt. Most other companies will also be looking to cut costs, likely through personnel. In fact, for many businesses that rely on consumer spending, the effects of enforced quarantine are already leading to layoffs, particularly in the non-essential retail and service sectors.

We’ve spent years with our colleagues, building relationships with each other, learning each others’ workflows and how to cooperate effectively together, and essentially building strong company inclusiveness. We do not want to see our friends and coworkers lose their livelihoods and struggle to find new positions right at the start of a major recessionary period. We believe our people are highly skilled and could eventually find jobs, but the stress would be considerable and we would like to prevent such circumstances if possible. This gave rise to our loan scheme plan as a solution to reducing headcount losses while ensuring the company has runway to ride out the worst of the recession. 

 

The Salary Sacrifice to Loan Scheme

It is normally the employer that provides a loan to the employee, who eventually pays it back at an interest rate below the market. Conversely, in our Scheme, the company receives loans from the employees. Note the use of the plural here, as we are sourcing funds from several employees to make loans to the company as a small sacrifice of their monthly pay. With 35 employees, even small fractions of monthly salaries can quickly add up to large monthly sums, in turn providing enough funding to keep more jobs on the payroll.

We asked employees to provide a number they could comfortably forego every month and attached an interest rate well above the market rate – 15% for the first year and 20% in subsequent years, annually compounded. The rate may seem high from the employer perspective at first, but an uncollateralised loan to a startup can be quite risky. No one is forced into the scheme, and the amounts contributed are certainly kept private. We will internally publish the aggregate total as well as how many positions this loan scheme has been able to shield.

Here is an example of how the scheme works in practice:

An employee agrees to sacrifice $5,000 per annum, or about $415 per monthly paycheque. The company agrees to pay interest on a rolling monthly basis as the amount accrues to $5,000 over the year. At the end of the first year, the first month’s “instalment” is worth $477, which is $415 * 1.15 = $415 * (1+15%).  At the end of the second year, the same one-month portion of the loan becomes $573, or $477 * (1+20%) = $573.

To illustrate with dates, if an employee sacrifices $415 in April 2020, then their sacrifice will be worth $477 in April 2021 and $573 in April 2022. The same sacrifice will apply to an amount loaned to the company in May 2020 and valued in May 2021 and May 2022. And so on for every month of salary-to-loan participation. At the end of the first year, in April 2021, $405 would be earned on the total sacrifice, nearly an entire month’s contribution. Of course, 15% has only been applied to the April 2020 contribution by April 2021. The sacrifice in March 2021 will have only accrued a small bit of interest by the April 2021 valuation.

 

When will the employees be paid back?

  • If we get a big investment, and the investors agree to pay off the loan.
  • If we become cash flow positive, we can repay the loan over a few months in a phased manner which doesn’t affect the business.
  • If we get acquired by any other company
  • If we fail, there is a risk that the entirety of the loan is lost. Hence the high interest rate.  However, there is a lot of value in our product, and we believe the IP and technology is saleable.  If we are able to sell the IP or tech, the proceeds are typically distributed in the following order:
    • Unpaid salaries
    • Suppliers
    • Loans from employees
    • Equity shareholders and option holders

In summary, in order to preserve the company’s cash in a time of decreasing revenue and expanding costs due to FX risk, we have turned to our own employees to cut costs. Importantly, though, we will be able to save jobs, rather than eliminate them, with our cost-cutting measure. Our CEO naturally made the first sacrifice, and we have already signed up employees to go along with the scheme. 

 

Unconventional methods for unconventional times

These are unprecedented times. Markets are dropping precipitously; currencies are wildly gyrating at every new government announcement; a dangerous, highly-infectious disease is ripping through a globally-connected population at terrifying speed; once steadfastly-open borders are closing; beaches, cafes, restaurants, and shopping centres are shuttered. These events call for unprecedented measures and sacrifices by companies, governments, nations, and individuals. 

Companies are shifting towards remote work. Governments are suspending utility bills and mortgage payments. Some governments are even mulling the idea of a crisis-driven universal basic income or at least a stop-gap for lost wages. In these trying and frankly frightening times, humanity can come together to bring economic and social interaction back to life. 

At CityFALCON, we are doing our part to blunt the full force of the pandemic fallout and the coming deep recession by cooperating with our fellow coworkers. How are you contributing? Let us know in the comments. And track updates about the coronavirus with the shared watchlist below. Click it or copy and paste it to your friends, coworkers, and family. 

Shared watchlist on COVID-19 and Oil Price War: http://www.cityfalcon.com/watchlists/194eeb30-a1a6-442c-94ad-d21505049255