Allen Zhu, Managing Director of GSR Ventures, is famous not only for leading early stage investments in Didi, ele.me and ofo, but also for his blunt public statements.

His recent presentation at a CEIBS event caused quite a stir. This is one of the slides he used:

Rapidly and decisively optimise and adjust organisational cost structure  

  • Rapidly adjust cost structure, the earlier the more responsible for the company as well as the employees; 
  • Chope into the bone at one cut, avoid slicing meat with a slow knife;
    • Plan A: Lay off X% of employees;
    • Plan B: delay or lower X% of salary payment:
      • Senior management 80%;
      • Middle management 50%;
      • Ground staff 20%
    • Plan C: stop paying salaries, just social securities:  

Explaining this slide, he said: “You must rapidly and decisively cut the cost, the sooner you cut the cost, the more responsible you are towards the company as well as the employees. For the company it is obvious. For employees, the sooner they are out of job, the easier it is for them to find a job elsewhere. The longer this drags on, the harder it is for them to find a job.”

He made this assessment based on a few observations/data points:

  1. The crisis might last for more than one year;
  2. The unemployment caused by this crisis might exceed any crisis in history;
  3. Eight provinces in China saw more than 10,000 companies shutting down in Jan-Feb 2020, with a total number of almost 140,000 closures

Zero-based budgeting 

He advised founders to all start Zero-based budgeting, as if they are starting their venture from the very beginning.

It is easy to cut staff, suppliers and renegotiate payment terms; the more difficult decisions are about projects which will take more than 6 months to show results, as well as customers which have not yet generated positive cash flow.

B2B & SaaS, finally

Zhu mentioned that this crisis could herald in the golden era of enterprise tech, a sector where “China is 10 years behind the US”.

In the following graph, it compares market cap of companies from US/China in (from left to right) consumer internet, fintech, and enterprise services:

And from a capital deployment point of view, enterprise companies are more efficient. “Zoom raised a bit more than US$100m before IPO, and now the market cap has reached US$20 billion; in comparison, Uber burnt US$10 billion to achieve US$6 billion valuation prior to IPO.” 

We thought the comments were interesting, and probably valid.