What impact does this year’s epidemic have on small and medium-sized enterprises? How will small and medium-sized enterprises respond after the epidemic?

Starting from January 30, the Dark Horse University APP launched the "Fighting the Epidemic" public welfare live course. We hope to help entrepreneurs formulate strategies, reduce losses, and accumulate strength to meet this round of challenges by sharing practical entrepreneurial experience in responding to the epidemic. This afternoon (February 1), the third lesson started. We invited Wu Shichun, mentor of Dark Horse Lab and founding partner of Meihua Venture Capital, to share "How to Correctly Assess the Impact of the Epidemic on Business." The following is a selection of live broadcast content.

What impact does this year’s epidemic have on small and medium-sized enterprises? How will small and medium-sized enterprises respond after the epidemic ?

01
Cognition: Traveling in "Hell Mode"
At the beginning of 2019, Wang Xing said: 2019 will be the most difficult year in the past ten years and the easiest year in the next ten years. He is a prophet. I thought 2020 was just a "difficult mode", but who knew that the reality would be a "hell mode".
The impact of this epidemic has far exceeded that of the SARS in 2003. The development of online and offline networks has made the epidemic more contagious than before, causing a tsunami-like impact on the entire society. Every entrepreneur must have a deep understanding of the impact in order to make the right decision.
My overall judgment is as follows:
First, the impact of this epidemic may last longer than three months.
This means that many industries had no income in the first quarter. This will have a huge impact on many industries. For many small and medium-sized entrepreneurs, these impacts are irreversible trauma. If a household goes bankrupt or has a lot of debt on its balance sheet, it can repair its balance sheet by paying off debts over a long period of time. But if a company's balance sheet deteriorates too much, the company will disappear.
Of all organizations, businesses are the most vulnerable. Because once employees don’t get paid and their morale is unstable, the entire team will quickly lose its combat effectiveness. Therefore, compared to the country which can continue to collect taxes and households which can continue to repay their debts, small and medium-sized enterprises are the group most vulnerable at the moment.
Second, the damage caused by social panic is far greater than the actual damage caused by the epidemic.
Due to panic, people may reduce their consumption outside and reduce other economic activities, resulting in a significant decline in social consumption and income from economic activities. In the future, some industries will see a decline in revenue in the first quarter or even half a year. But rigid costs such as taxes, rent and employee salaries are impossible to reduce. The decline in consumption levels across society will interrupt or impact many existing economic chains.
Third, excessive social mobilization also causes huge resource consumption.
Nowadays, many people spend their time on group prevention and control. Excessive social mobilization will lead to excessive waste of resources.
Fourth, after a major disaster or epidemic, the entire social economy may be at risk of recession.
If the country does not take "drastic measures" such as drastic tax cuts, substantial rent reductions, and banks' continued loan renewals after this disaster and epidemic, the entire social economy may be at risk of recession. This risk has a greater impact on China than the combined impact of SARS and the trade war.

When a major crisis strikes, what should entrepreneurs do? I have a few suggestions:
First, we should improve our awareness of crises and our ability to cope with them.
Second, only with clear cognition can we make correct decisions and turn crises into opportunities.
Third, only when the founder has strong willpower can he stabilize the morale of the troops and achieve a smooth transformation.
Fourth, by outperforming your peers, your micro-efforts can partially offset many macro- influences. In many industries, the last one standing will be the winner. During this crisis, some weaker companies may disappear.
Fifth, clearly set goals for this year. Survival and maintaining market share are the goals this year, not profitability.
Sixth, Churchill once said, never waste a good crisis. Perhaps this crisis is an opportunity for you to stand out and outperform the market. Therefore, entrepreneurs should turn crisis into opportunity.

Which business models will face greater challenges? All industries involving face-to-face contact, such as tourism, aviation, catering, offline education, exhibitions and offline stores, will be greatly affected. The South has a long tradition of flower markets during the Spring Festival , and many practitioners rely on the Spring Festival flower markets for their annual income. Suddenly, an epidemic wiped out a year's expectations and income. The ski resort will definitely lose money throughout the year. This will have a knock-on impact on upstream and downstream practitioners and offline suppliers in the chain, and may even hit housing prices.

Which business models will benefit? All industries that can be online and IP-based will be favored. All industries related to health and medicine will be favored. E-commerce, short videos, online games, social networking, and VR alternative tourism will benefit . The revenue of "Honor of Kings" on New Year's Eve reached an all-time high of 2 billion yuan. The unmanned delivery and drone industries will also benefit from the new developments. I am also extremely optimistic about private doctors and some medical industries. In-city errand services and intra-city logistics will also have better opportunities.

During the crisis, which business models will evolve and differentiate? The integration of live streaming with many industries will be accelerated, such as live blind dating, live education, and live fitness. Meihua Venture Capital invested in a dark horse student who does live fitness broadcasts and his recent data is also very good. There will be a big differentiation between offline convenience stores and fresh food e-commerce in the future. Fresh food that can provide higher quality products, better organizational methods, and faster logistics will have great development opportunities.

02
Mental strength: Keep yourself and your team in good spirits

For every small and medium-sized enterprise and every entrepreneur, in addition to improving the awareness of the epidemic and the industry, they also need to have a strong mental strength. Once you panic, the probability of you making a wrong decision will double. Entrepreneurs must have a strong mental strength to stabilize the morale of their troops. Entrepreneurs should treat every crisis as a training experience, and make better iterations and optimizations to their teams and organizational structures at any time. Therefore, this epidemic is a huge test for the determination of entrepreneurs and the stability of the team. If entrepreneurs can win this test, they will be rewarded greatly by the market.

So, how to stabilize yourself and your team?
First, all employees should immediately start working on the spot to accumulate potential energy for after the epidemic.
First, executives need to be on the same page. A song that Dark Horse often sings is called "Persistence". Persistence is victory. In the face of such a major crisis, senior executives must unify their thinking and convey the company's understanding of the crisis and the understanding that "persistence is victory."
Second, get all employees into work mode as soon as possible.

The beginning of the year begins in spring. Once an enterprise or organization is idle for too long, it is very easy for the morale of the team to be weakened. So, you can't stop and you can't be idle. Enterprises must maintain a state of constantly winning battles and accumulating small victories into big ones. Some work cannot be done face-to-face, so it has to be done remotely. It is necessary to ensure that every employee is online and in working condition. Even if it's just doing some online customer follow-up, customer service, or fixing some bugs.

Third, innovate business models.

At this stage, we must consider using live broadcasts and short videos to acquire customers. Live streaming may change many industries, and short videos may become one of the main means of acquiring customers in many industries.

Fourth, at work, use remote work software more often to ensure that your work efficiency at home can be quantified.
Nowadays, there are many remote work software, such as Alibaba's DingTalk, Enterprise WeChat, Toutiao's Feishu and Huawei WeLink, which are all very mature and stable.

Fifth, the company must set up a prevention and control team to care about the physical and mental health of all employees.
While fulfilling our corporate responsibilities, we must also fulfill our social responsibilities. Some non-critical positions can be done through part-time staff and outsourcing. At this stage, the company must reduce staff and increase efficiency and cannot add additional staff.

Sixth, adjust the organizational structure.

Adjusting the organizational structure can unleash the potential of employees and delegate management authority. Small unit responsibility is an important way to resist major disasters. In a major crisis, the Amoeba system will make the company more dynamic.

In 1978, many communes were not able to get enough food, so Deng Xiaoping implemented the contract responsibility system and turned the communes into small families. Once the contract responsibility system is implemented, everyone will be responsible for his own meal, and his enthusiasm and initiative will be mobilized. The contract responsibility system for linking remuneration to output is the smallest amoeba.

We need to pay attention to the sales profit of each A-MEBA organization and control operating expenses. We need to pay attention to the performance goals and smaller-scale assessment indicators of each small organization.

A lot of innovation comes from unleashing the enthusiasm of employees. We want to make every employee a locomotive rather than a carriage. By fully mobilizing the enthusiasm of our employees, we innovate and optimize our business. Include cost reduction in employee assessments and link it to employee performance and incentives. In this way, the company's costs will be reduced and leakages will be controlled.

If a company’s business encounters a major setback, in which direction should it transform?

In the face of a major crisis, it is very important to meet people's basic needs. What are the needs at the moment?
First, machine substitution. Machine replacement means avoiding human participation and intervention, and using software and machines to replace scenarios and links that originally required human work. Machine substitution includes pan-robots, such as drones, industrial robots, intelligent AI and artificial intelligence software, which are all forms of machine substitution.
Second, rigid demand. Rigid demand refers to the demand needed to maintain people's basic life, entertainment and business operation. Food, clothing, housing, transportation, enterprise operation and maintenance, and enterprise customer acquisition are all rigid demands.
Third, the lipstick effect. In times of economic downturn, the "lipstick effect" will also become very obvious.
Fourth, online substitution or remote substitution. Products and services that can replace on-site personnel remotely will become popular.

03
Strategic thinking: Quickly count the number of months of cash available

For entrepreneurs, what are the core key indicators to consider now?

First, quickly take stock of how many months of cash you have available in a crisis.

If the epidemic continues for three months, five months or even longer, and revenue suddenly drops to zero, how long can the company continue to operate? If the number of months of cash available in the account exceeds 18 months, it is very safe. More than 12 months is relatively safe. More than 6 months is on the verge of danger. If the funds in the company's account can only last for three months, it is in crisis and needs to immediately lay off employees, cut salaries, and collect accounts receivable.

The company also needs to pay attention to accounts receivable and payable, strive to reduce the company's accounts receivable, and collect as much accounts receivable as possible. The company should also actively communicate with upstream parties to strive for longer payment terms. Entrepreneurs should put a lot of effort into payment terms. In a major crisis, the company should negotiate with its upstream and downstream parties to obtain longer payment terms from the upstream parties, reduce the occupancy of downstream accounts receivable, and ensure the safety of the company.

Second, increase the proportion of online income.

How many businesses can rely on pure online means to generate revenue and complete business? How much business must rely on face-to-face offline delivery and require contact with customers to be completed? The online rate is a very important indicator. For many companies, it is necessary to increase the proportion of online revenue.

Third, improve the IP capabilities of the business.

The stronger an enterprise's IP capabilities are, the stronger its ability to withstand crises will be. We need to pay more attention to building the company's brand, including the construction of patents, intellectual property rights, private domain traffic, etc., and companies such as corporate official accounts, corporate Douyin accounts, corporate Kuaishou accounts, and corporate Bilibili accounts should all be built in full swing.

Fourth, innovate your business model as quickly as possible.

After this crisis, the capital market gave high valuations to pure SaaS software companies. The original 10x PS valuation model will be upgraded to a 12x to 15x valuation model. Because SaaS is particularly effective in resisting crises. The capital market will give very high valuations to business models with a high rate of ITization.

Fourth, innovate organizational models. The Amoeba plus partnership system just mentioned makes the granularity of the company's departmental organizational structure smaller, delegates management rights, and stimulates organizational vitality.

04
Communication skills: Extremely bearish in the short term, cautiously optimistic in the medium term

Finally, let’s analyze what the financing situation in the capital market will be like after the epidemic.

After this crisis, the financing market is extremely bearish in the short term. For many investors, the first thing to do is to judge whether it will be easy to raise funds next time? What is the impact on the secondary market? Will the impact of the secondary market be transmitted to the primary market quickly? It can be predicted that the entire A-share market will enter a period of relative downturn, and may even see thousands of stocks hitting the daily limit again.

In the short term, the primary market, whether it is angel investment or VC investment, will be bearish. Next, within three months, financing events will decrease.

If you are raising funds, I suggest you pay attention to the following order: first, certainty; second, speed of payment; third, financing terms, no gambling, no buyback; fourth, financing amount; fifth, valuation .

First of all, at this point in time, entrepreneurs should not worry about valuation. Secondly, entrepreneurs need multiple channels to start financing. In addition to normal venture capital, entrepreneurs can also consider some debt and apply for some subsidies and guidance funds from the government. When facing investors, entrepreneurs need to have better adaptability. Now, there are many investors who are on the sidelines, and entrepreneurs need to meet more investors before they can find investors who appreciate you.

In the medium term, we are cautiously optimistic. During a crisis, companies that have proven their ability to survive will have a wave of better financing opportunities. Although the overall fundraising in the market last year was much less than the year before, most VCs still have money. From a five-year or ten-year perspective, China is still on an upward trend that is rare in the past few hundred years.

There will be some changes in the capital's judgment criteria for entrepreneurial projects, from the original emphasis on cash flow to a more bearish model on heavy assets. Capital will be more cautious towards heavy asset models where costs such as employee salaries, rent, and equipment leasing account for an excessively high proportion. Capital will assess the flexibility of the organization and hopes that the company's organization can be small and dynamic.

Capital will pay more attention to the online rate and IP rate of business revenue. The more online revenue and IP revenue a company has, the higher the valuation capital will give to the company. The capital's judgment criteria for entrepreneurial projects will shift and change to a certain extent. For Meihua Venture Capital, we mainly look at people, and your understanding of the growth of your cognitive ability and mental strength.

Facing this great crisis, everyone faces the same difficulties. If you can outperform your peers, you will be the last one standing. Just like SARS made Alibaba successful and forced Liu Qiangdong to move from the counter to e-commerce, this epidemic will definitely create a group of new entrepreneurs.

A crisis is a great opportunity for you to catch up with your peers.

Q&A

Dark Horse: Do all business models need to be moved online? If there is offline delivery, how to reduce the delivery caused by the epidemic?

Wu Shichun: I don’t think every business model can be moved online, but some aspects of the business model can be moved online, such as customer training, and technical support can be provided remotely. For example, customer care can also be done online. If offline delivery is indispensable, we will try our best to reduce the online delivery links to a minimum, make the advance payment first, and adopt the membership-based prepayment method to obtain income as much as possible.

Dark Horse: How can startups that are already facing tight cash flow cope with the impact of this epidemic and maintain their cash flow lifeline to survive?

Wu Shichun: Lay off some unnecessary employees, cut executive salaries, strengthen the collection of accounts receivable, and transform the revenue model. Survival is the top priority for every entrepreneur.

Dark Horse: How can the catering and tourism industries break through?

Wu Shichun: This year, there is no need to worry about the catering industry. It is just a matter of how much loss will be suffered. The tourism industry is also difficult. However, some of the tourism industry projects we invested in provide SaaS services to scenic spots, and the income of such enterprises is relatively stable. Catering and tourism, which rely on people to consume in real-life locations, have been affected even more than SARS.