Businesses could need 3 years worth of cash to weather this recession - but a new study shows half of small businesses only have 27 days of cash in reserve
- Social Capital CEO and former Facebook VP Chamath Palihapitiya went on Kara Swisher's "Recode Decode" podcast and predicted that businesses will need 36 months' worth of cash - that's 3 years - to weather the coronavirus recession and recovery.
- But small businesses - including many startups - likely don't have these kinds of reserves.
- A JPMorgan Chase Institute Study found that half of small businesses only have enough cash to survive 27 days.
- Growing businesses - which are often small startups - also account for a good chunk of job creation.
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Businesses may need 36 months' worth of cash to weather the recession and its recovery, Social Capital CEO Chamath Palihapitiya told "Recode Decode's" Kara Swisher.
Swisher asked Palihapitiya - a former Facebook VP and founder and CEO of the venture capital firm Social Capital - how startups can prepare for the coronavirus impact. Lucia Moses at Business Insider has reported that many startups are already feeling the effects of the pandemic.
"I think people need to make hard decisions to preserve at least 36 months of cash. If you're not doing that you're not giving yourself enough of a buffer for all of this to sort itself out," Palihapitiya said. "Take the Great Depression, or take any recession, for any month when you're in the drawn-down phase, the part of going down, it takes two to three months to get back up. So if this takes nine months to sort itself out, we're in month one, so it could be eight more months, so it could take 27 months to get out. So unless you're giving yourself 36 months of runway, you're putting yourself in a position where you will be at the behest of the price-maker."
Experts say that we may be headed for a "startup depression," as Dominick Reuter reported for Business Insider. One JPMorgan Chase Institute study found that half of small businesses only have enough of a cash buffer for 27 days. The buffer is how many days a business can pay its usual expenses without bringing in any money.
More than 99% of all businesses are small businesses - including many startups - and they employ around half of the US workforce. Smaller tech startups have already seen layoffs, as Business Insider's Julie Bort reported.
"This is going to trigger a once-in-a-hundred-year event that has the perfect storm of conditions for cratering a huge portion of the American small-business community," John Lettieri, the president and CEO of the Economic Innovation Group, told Reuter.
And Lettieri noted that new businesses - those that scale and grow - are often the largest job creators, meaning that there may be a double whammy of startups going under and the economy losing the new roles they would have created.
For the two million workers forecasted to lose their jobs due to a recession brought on by the pandemic, that lack of new roles will likely be felt deeply. If Palihapitiya's prediction holds true, to weather the storm and continue hiring businesses will need to find significant cash reserves - from somewhere.
Get the latest coronavirus analysis and research from Business Insider Intelligence on how COVID-19 is impacting businesses.