Killer Companies

I have watched a few webinars on how to talk to Limited Partners and investors.  What do you say in times like this?  What should you be thinking about?  What should you be thinking about in terms of what is going through your LP’s minds?

All good questions.  By the way, if you are an LP in our fund we have a call coming up.  Make sure you sign up and check your email!  Interestingly, we scheduled our call after we got our audit back not because of any issues around COVID19 or the audit.  It’s something we do every quarter.  But, no doubt, C19 will be one topic of conversation!

One thing that every webinar and a lot of online advice has included is this;  In prior downturns, killer companies were created.

This is true.  However, it’s a bit naive and a lot of pattern matching to think that a killer company is being created today. If it is, it was probably started before the virus, not as a result of the virus.  Certainly, some companies were positioned well to take advantage of the situation.  We have some in our portfolio and I have some in my angel portfolio.  It’s really fun to watch resilient CEO’s work through this kind of problem.

If you are a small fund like ours, you have exactly zero chance of raising another fund now.  The VC industry is going to take a bruising.  I don’t think the floodgates open up again until at least mid to late 2021.  People will want to see the dust clear and who is left standing.  We could see a world where allocations to venture drop.  When the stock market is on sale, it might be smarter for a lot of entities to put money in equities than it is alternatives.  There will be fund of funds that go under too.

I think an advantage our fund has is trading through several downturns.  Gives you a different perspective.

Here is the advice we have given the CEOs in our portfolio:

1.  We invested in you.  We are confident you can lead your team through this.
2.  When you talk to your team, be transparent.  Show them the difficulties, but also show them hope.  Teams survive on hope.
3.  Make sure you worry and execute on things you can control.  There are a lot of uncontrollable variables now.  Don’t think about them or spend time worrying about them.
4.  If you can open up a line of credit, do it.  If you can apply for an SBA loan, do it.  You might or might not need the money but cash is a nice thing to have.  If you can extend payables and renegotiate some contracts, do it.  If you can bring in receivables quicker, do it.
5. Have a serious heart to heart chat with your investors.  Know your burn rate and their appetite for supporting you.
6. If you have interested investors, talk to them about doing a round.  You might get a lower price than three months ago, but if you can take on some money and it doesn’t cost you a boatload of equity the tradeoff is worth it.
7. There will be companies that fail.  Great talent will be on the sidelines.  You can pick them up but make that great talent prove themselves.  If they are salespeople, they need to go out and sell.  Bring you orders, pay them a rich commission.  Do it again.  Scrappy wins, not credentials.  If they prove themselves, hire them.  That being said, hire carefully!!
8. There will be opportunities that didn’t exist before that will avail themselves.  Go after them if it doesn’t burn a lot of cash or entails using a lot of cash to support something after you get it.  They probably will be smaller opportunities that could eventually be big.  Make sure the CAC>LTV….and most of all if it isn’t working cut the cord and fail fast.  Live to fight another day.
9. Some of our companies have cut their pay already.  They are doing without or making it up with options.  It’s extending their burn.
10. Competitors will go out of business. Grab their customers and earn their business.
11. Take some time for yourself each and every day.  Go for a walk-no phone on.  Work out.  Stretch.  Do yoga.  Anything to get away for a little bit.  Key in a crisis.
12. Oh, and if you need us for anything, don’t hesitate to call, email, or text 24/7.  We will actively work for you as we always have.

There will be some killer companies created in the wake of this.  However, I don’t think brand new spanking companies will be created until at least the back half of this year.  I also don’t think the smoke has cleared enough to know what will be huge yet.  Other crisis situations were not as widespread.  In the last downturn, the financial crisis put good people out of work.  However, the mobile phone was the game changer and the surfboard everyone road to smashing success.

Our fund is still actively looking for investments but we are not running around with money burning a hole in our pocket.  We consistently think about our existing portfolio and things we need to be doing to support it.  Sometimes that is being creative about how they find money.  That’s not going to Vito and getting charged a 55% interest rate but it might be reaching out to various non-traditional investors to see if they might want to participate in some way.

There will be funds that might want to sell positions in great companies too in order to provide liquidity to investors.  Figuring out how to help entrepreneurs navigate that is one job we are preparing to do.  It’s also a way for an enterprising fund to grab more equity in an existing portfolio company-or in a company they would like to be a part of.

There are some obvious things we are learning.  For example, distance learning will be huge.  But if you start a company today, you are way late.  However, a private equity-type roll-up of existing distance learning companies to create a big SaaS platform might be interesting.  A lot of people might be looking at different types of manufacturing given we need masks, respirators, ventilators and other specialized equipment.  Why can’t existing companies just expand capacity?  Why won’t governments stockpile?  If it’s obvious, then it’s probably not a good entrepreneurial idea.  Some things that seemed too early might get some traction.  Some things that seemed on point might be dead.

It’s abundantly clear a lot of other things are going to change that entrepreneurs have no control over.

A little humor helps you deal with a crisis too.