By David J. Blumberg
COVID-19 has brought about economic uncertainty and a likely downturn, making it all the more complicated for businesses to adapt due to its uncertain depth and length. While it’s critical to remain calm and take a long-term view during times of such volatility, it’s also important to act quickly and decisively to modify short-term strategies and preserve and extend resources to keep business running.
As we navigate the challenges caused by COVID-19, we’re working closely with our companies to support them and help them manage through a potential weakening of markets and funding outlook. Building a successful company is a long-term endeavor, with the average venture-backed exit now taking 5-7 years and often longer. In the shorter term, the battle is to retain cash flow to maintain your business, your employees, your product development and growth plans, which is usually measured in periods between funding rounds – typically periods of 12-18 months.
We’ve encouraged our ~70 CEOs to quickly formulate or revisit their contingency plans creating “what if?” stress tests for the variable length and depth scenarios of this downturn. With this planning, the C-suite can then work together collaboratively from the same page, even if WFH, to implement short-term stabilization efforts including operating expense reductions and deferrals, defending revenue and playing offense to gain market share, advancing product development or even making acquisitions as opportunities arise.
What’s an VC and angel investors to do?
My advice to venture capital investors is to take a deep breath and maintain a long-term perspective. For early stage VCs, we invest from 10-year funds with a relatively patient exit horizon measured in years, not months. We’re not day traders. We shouldn’t sell in a panic when the market crashes, but this benefit of patience comes along with the cost of declining valuations and the need for additional capital to support some portfolio companies. Consider this period of economic volatility, and for planning purposes, equate it to a lost quarter, lost half or longer, but the economy will rebound eventually, and most of our tech investments are better positioned to recover than other segments.
VC investors and angels can and should be seeking out new opportunities, even or especially at this time, with the proviso that early stage companies may need more cash for a longer runway than normal. It’s well known in venture circles that some of the best venture-backed companies have been founded and funded in recessionary times. Examples of this include Facebook, Electronic Arts and Microsoft – and from our portfolio – Nutanix, DoubleVerify and Braze.
What’s a startup to do?
Overall, this period should be seen as a valuable time for entrepreneurs with enough resources to survive 3-12 months of minimal new sales to focus on developing better product, automation of internal processes and keeping existing customers well-served and satisfied. Following this advice will strengthen the company in the upcycle to respond to the presumably pent up demand and resumed competition.
However, it will undoubtedly be an unprecedented and confusing time for employees and managers alike – here’s our advice:
– Reach out on a personal level to employees, colleagues, investors and treat them well. They’ll have a long memory. In these circumstances people work best with structured processes, familiar routines and when they feel connected, listened to, seen and supported.
– Actively engage and utilize “social enterprise” tools for a work from home environment that may endure for months
– Consider adjusting KPIs and evaluations with flexibility, yet maintain rigorous measurement and efficiency.
– Act rationally, not emotionally and base your actions on a clear set of assumptions that everyone understands.
– Keep your eyes on the long-term vision for growth and scale, but take appropriate defensive measures in the short term.
– Understand that not everything can be saved, but not everything will be lost.
– Review your budget and focus on cash flow with scenario planning alternatives.
– Reallocate budget to top priorities and defer or close lower priority initiatives.
– Look for creative ways to cut costs by temporarily lowering salaries (starting with your own), deferring salaries or in some cases trading salary for equity options. Always check with your legal and HR team for compliance.
– Assess your credit situation with your lenders and draw down available credit before its needed.
– Stay tuned for unprecedented opportunities and take advantage of significant cash coming from Washington with the CARES Act for companies under 500 employees and emergency loans from the SBA.
Now is the time for portfolio company CEOs to prove themselves as trusted leaders and come out stronger on the other side.
There’s a light at the end of the tunnel
During this period of unprecedented economic uncertainty, worried employees, stressed customers and family issues will make it hard to carry on business-as-usual. But it’s not impossible. You were made for this day, rise to your potential.