Guidance For Startups/VCs From VCs Around The Globe During COVID-19

Ed Zimmerman

March 23, 2020

As news of COVID-19 and its impact rapidly unfolds, tech companies, their employees and investors are reviewing guidance regarding the financial future[1] of their startups/growth companies and how investors are seeking insight into how the venture markets will behave.

In an effort to gather useful guidance, over the last week, I spoke with dozens of senior venture capital investors (VCs), with a heavy emphasis on those who’ve been in market since at least the 2008 downturn (see disclosure[2]). Below is an amalgam of the on- and off-record responses they provided from New York, California, Chicago, Boston, London, Berlin, Paris, Stockholm, and Nigeria. I’ve parenthetically provided dates of the conversations, as the rate of information change has been rapid.

TLDR: Deals are still happening (more so where there are pre-existing relationships). This contrasts prior crises (July 1997, Spring 2000, September 2001, August/September 2008) when the venture markets ground to a halt as people recalibrated. Neither my partners at Lowenstein Sandler nor the VCs interviewed for this column are observing such a halt, though the market change has been abrupt, deep, and has permeated every conversation.

Aileen Lee founded Silicon Valley-based Cowboy Ventures, from Kleiner Perkins which she had joined in 1999, just in time for the dot.com meltdown. She famously coined the term “unicorn” for $1B+ valuation startups. Lee (March 15) emphasized the likely lack of uniformity in reaction: “To be honest, it's too early to tell from our perspective. I think a lot will depend on each partner and fund - what's going on in a partner's portfolio, where a fund is in its lifecycle, how many challenging situations they are working on, how much portfolio triage is needed, etc.” Her comments echo guidance published by Lo Toney (Plaxo), a professional LP (investor in venture funds). As he wrote (March 17) “This analysis will differ depending on where a GP is in the process (i.e., considering going to market, the middle of fundraising, or recently closing a fund).” 

This column (1) contrasts the pandemic crisis with prior crises (2008 in particular), (2) provides context on my vantage point, (3) explains what’s happening inside venture firms (risk and “reserves” analysis and the “Denominator Problem”), (4) discusses the premium VCs are presently placing on experience and existing relationships and contextualizes the guidance founders/co-investors should draw from that, and (5) outlines concrete steps founders and investors will want to consider.

(1) Contrast: the ’08 Decline vs the Pandemic System Shock

PJ Parson spoke (March 19) from his home in Stockholm. He was “Spotify’s First Investor” (Fortune Magazine), leading the A round in 2008; his two multi-billion dollar liquidity events in 2018 helped land him in the #2 slot on the Forbes Midas Europe List. PJ explained: “Spotify was founded during the crisis, more or less, and had to raise capital through a really difficult market situation. Spotify's first financing round took a year and a half to complete, so they battle-tested the team early on.” Here’s how PJ’s looking at the current situation through the lens of past crises:

“For me, as a VC, the first crisis was in 1997, which began in Asia. Then we had the dot.com crisis and then ’08. Not only was '08 difficult for many startups, but we (as a fund) were pretty deep into clean tech and that was wiped out. Everyone who was heavy into clean tech was betting on it going from government-subsidized sector to a free market-fueled sector. That hypothesis turned out to be flawed when the markets fell apart. We’re now trying to determine whether there are situations/sectors that are like that now; which sectors will not be sustainable at all. The return of sustainable unit economics will be extremely important for startups that want future funding. WeWork is an example of a growth company that doesn’t have sustainable unit economics.”

Will Hsu co-founded Mucker Capital (Santa Monica) and led the firm’s investment in Honey, which PayPal recently acquired for $4B (which the Wall Street Journal reported would return “proceeds of $280 million from the $3 million [Mucker] invested in Honey”). Hsu’s reaction to the market (March 16):

“When it does dry up like in 2001, it took 5+ plus years for it to “come back.” In 2008, it never dried up. In fact, after the “RIP good times” presentation, Sequoia accelerated their investments (Airbnb, Whatsapp etc) to take advantage. It was a head fake, and most VCs, after noodling on it for a couple months, also jumped in. It didn’t hurt that Google, Apple, Groupon, Facebook, Twitter, Zynga, Salesforce were all growing like crazy revenue-wise and all the VCs knew that we were in the golden age of platform shifts (mobile + SaaS + social). In this case, I believe VCs are waiting for market volatility to drop before jumping in. Everyone has a ton of dry powder and is waiting for some certainty before getting back to normal (as long as the public markets does get back to normal).” Note that Ian Sigalow, cofounder of Greycroft Ventures, tweeted a similar view of Sequoia’s 2008 “RIP good times” deck.

Another senior VC who has been through numerous cycles remarked that ’08 was more like a “one-year reset,” so that “in the venture world, if your financing cycle was timed right, you could avoid it.” While my experience tracked Will Hsu’s (2008’s impact seemed to have longevity rather than a one-year impact), we can reconcile the two perspectives by noting that the pre-2008 period was not frothy for startups and VCs, so the difference for startups/VCs between post- and pre- ’08 was not enormous. In contrast, the pre- and post-dot.com periods differed dramatically, both in terms of startup valuations as well as access to capital on either side of that period. The presumption now is that, at least in the near term, the difference will be very pronounced.

Ira Weiss, a Professor at University of Chicago Booth School of Business and co-founder of Hyde Park Venture Partners (which announced in December that it had raised a $100M third venture fund), has been seed/early stage investing for 20 years. On March 21, Weiss spoke from his home in Chicago:

“It’s just like other downturns, where you never really know. 2008 started happening but you weren’t really sure how bad it was going to be. Once everyone realized how bad it was getting, it slows down a lot. Investors go inward (I have my own portfolio to tend to). But you also have opportunities to get involved in companies you’ve always wanted to be involved in financially.”

Adam Marcus, Managing Director, at Providence Strategic Growth, has worked at startups and venture/growth funds since 1998, with a brief detour to work for the Boston Celtics (during which he did not get court time). From his home in a Boston suburb (March 19), Marcus distinguished the present crisis from ‘08:

"The ‘08/’09 downturn happened more slowly. People were still spending money. Going out to restaurants, gyms, nail salons etc. Even at the worst point local commerce was happening. This [COVID-19 market shift] is like ripping the band-aid off. It’s so abrupt and intense. We went from a white-hot economy to basically a recession overnight. It’s unfathomable.”

PJ Parson focused on the psychology of passing familiar streets on which everything is closed (March 19):

“There will be a continuing shift in valuation in the public markets, which will leak into the private markets, as the markets harmonize (public and private). During the dot.com crash, it took a long time for private prices to drop to a sustainable level, but the '08 crisis was much quicker. In '08, there was so much anxiety in the entire financing system because everyone thought that even the banks could go belly-up. The current crisis reminds me of that kind of panic. People are questioning systemic stability. If I go out into the city and see the restaurants that were jam-packed and are now empty and the shops are now all closed, won’t that impact the health of everyone else in the system? So that generates a lot of anxiety in the system now. That turns out to be much bigger than we thought just a few weeks ago. The good news is that as soon as we get certainty on this and trust that this is under control in early geographies (China, South Korea, Italy) we can make reasonable assumptions about how it plays out in other geographies. That enables us to spread the learning across boundaries and to adjust faster as a result.”

Takeaways: The faster founders (on the one hand) and investors (on the other) can mutually agree on a resetting of price/terms, the faster the markets can lurch forward again.

In a deteriorating market, the eventual price/terms will be less favorable than today’s price/terms. If you’re early stage, don’t over-negotiate price (focus on the terms likely to impair future financing, but don’t haggle too much over those). Growth companies have a different set of variables to manage (detailed further below), including that growth-oriented VCs have a shorter time horizon, more sensitivity to public company multiples/likelihood of liquidity over three to five years, and invest much more on company-specific data/metrics. Growth companies also require far more cash to operate, so each growth company’s access to cash (and whether you’ve recently closed on funding) will have a material impact on your own go-forward prospects.

London-based Jan Hammer (March 15 and 19) was ranked #1 on the Forbes Midas Europe List for leading Index Venture’s successful investments at Adyen, RobinHood, TransferWise, Colibra. He spent 2003 through 2010 as an investor at General Atlantic, before joining Index a decade ago.  “Those who need the cash or are at the finish line are scrambling to close things - I have more than a handful of deals closing last week and during this week, including one done from start to finish in the last ten days.” My partners at Lowenstein and I are seeing our contacts at funds similarly involved in shoring up capital for existing portfolio companies.

(2) Context: the View From my Seat

I’m no stranger to nausea-inducing markets in venture. My Lowenstein Sandler partner Anthony Pergola and I hosted the first VentureCrush event in our office in March 2000… on the day NASDAQ crashed. We wondered why the 10 or so VCs in the room kept eyeing their Blackberries and PalmPilots — yes, PalmPilots! 

On September 10, 2001, I was counsel to two NYC-based startups that signed term sheets for their Series A venture rounds. Both deals were paused the next morning when tragedy struck (I lost a close friend and client that day, from whom I learned valuable lessons). Afterwards, the VCs on one deal materially re-traded (‘the world has changed,’ they told us) and the VCs on the other didn’t (‘we signed our name and that means something; we still believe in you,’ they said). Both deals closed. Both startups went on to generate real revenue and close on subsequent funding. One of those companies had five CEOs, the other was founder-led from start to finish. While my law firm’s venture/growth company practice closes more than 500 venture and growth deals a year, I very much recall the post-9/11 market in which I believe our team handled more wind downs than deals. My perspective (and this article) are also informed by my activities as angel investor and a personal investor in venture funds, predominantly in the U.S. and Europe. I began angel investing in 2006 and, in contrast to the pre-March 2020 market, from 2006 through 2010 I don't recall angels fighting for allocations in deals. During that same (’06-‘10) period, we all wanted more checkwriters in our deals and observed many investors exit the market, a phenomenon we had also observed in ‘01/’02. This mirrors what many investors are now thinking, as a friend who runs a fund in New York and London told me (March 19): “This is a time when having a strong syndicate of investors matters. Having investors around the table with a lot of capital and the ability to support their portfolio will matter.”

As to the two term sheets my team helped our clients sign on 9/10/01: we helped sell one of those startups for more than $100M and represented the other in a messy bankruptcy. But which was which? Did the VCs who ‘kept their word’ do better in the long run? That market period made an impression, as reputations and relationships were materially shaped or reshaped. Unsurprisingly, many of the VCs interviewed for this column over the last week explained that they are prioritizing experience and existing relationships (more on that below).

(3) What’s Happening Inside Venture Firms: Risk & Reserve Analysis

The venture firms themselves are segmenting their portfolios, especially for later stage, based on whether the pandemic positively (cyber security, some health-tech), neutrally (some business software) or negatively (luxury retail) impacts them, as numerous venture firms have already sent letters to their own investors (limited partners, or LPs) showing the percent of the fund’s portfolio in each of those three segments. Funds then sort their portfolio companies again based on need to raise capital soon and, for later stage, are near or at profitability. Similarly, a managing partner of a fund described ‘stack-ranking’ their portfolio companies from ‘most at risk’ to least. As an LP in venture funds, I’ve been receiving email after email referencing the fund’s having completed (a first cut at) that process. In conversation (March 20), another managing partner of a venture firm remarked that the “new BC/AD is BC/AC — before/after COVID-19,” noting that companies will be called upon to “prove their antifragility.”

In the AC/BC analysis, there’s an extent to which investors are viewing their companies differently. Marie Ekeland, has been a Paris-based VC for 17 years. She co-founded daphni (a French early stage VC), co-founded and led France Digitale, an association joining forces between founders and investors to develop the French digital ecosystem, and was appointed by President Macron as President of the French Digital Council (she resigned, see NYT). She sees (March 17) a widespread impact as part of a macro shift, noting an emphasis on the importance of both trust and profitability:

“I believe all companies will be impacted, as new ways of working together will appear, as companies, entrepreneur and investor reputations will be made or torn on how they treat their stakeholders (especially employees) and how they maintain continuity in their word and trust, as profitability will now be a target for more companies to build resilience from the inside, as usage (travel, healthcare, leisure, education...) will be profoundly impacted by this period.”

Jan Hammer also remarked on the aspects of what investors will evaluate anew: “investors will look at supply chains, demand impacts, length of sales cycles, and any long-lasting changes in customer behaviour.”

I’ve been in conversation with many founders and investors in the last week about the business implications of supply chain. Geographic differences will, of course, have disparate impact. For instance, Maya Horgan Famodu, founder of Nigerian-based VC Ingressive Capital, explained (March 18) “African businesses have had to temporarily close due to supply chain issues when sourcing from China.” She elaborated on the impact across her portfolio of local currency issues resulting from the pandemic. She has advised her portfolio companies to move cash to stronger internationally recognized currencies.

Reevaluating Metrics: Rick Heitzmann, cofounder First Mark Capital, has been a VC in NYC since 1999. He spoke from his home in Greenwich Village (March 20): “Business metrics are not working the way they historically have, so titrate that [advertising spend, expectation of growth, and near-term hiring] down and watch to see what you can glean. On the consumer side, it’s much easier to do. On the enterprise side, much harder. [Enterprise software sales rely on] conferences and events in order to do lead generation. The sales cycle for buying a sweater is four minutes, the sales cycle for buying enterprise [software] is four months, so you have more rapid visibility in consumer. It takes longer in enterprise to determine when your sales cycle is broken.” He also felt it made sense to be ready to move aggressively on sales and marketing once the dust settles, though we’re uncertain when that will be.

In addition to new lenses they’re applying to their portfolios, VCs are employing tried and true tools, including reserve analysis.

Reserve Analysis: The VCs interviewed for this column have already conducted a revised ‘reserve analysis’ (how a fund thinks about allocating its own remaining capital across different current and future portfolio companies). In the VC/Angel Investing class I’ve taught for 15 years in the MBA program at Columbia Business School, we study the Milliway Capital case, which details a venture firm’s ‘reserve analysis’ during November 2008’s downturn. It’s pretty much the same exercise.

Ross Fubini worked at Netscape in the 90s, spent 2000-’02 at TellMe Networks (acquired by Microsoft for approximately $800M), founded a startup two months before the ’08 crash (which he told me ended up returning roughly 8x to his investors), and in 2016, founded XYZ Venture Capital in San Francisco. Fubini recently raised XYZ’s second venture fund. We spoke on Saturday night (March 21) from his home in Santa Rosa. As a seed and early stage investor, he told me he’s “closed four financings in my portfolio in the last week.” So, like Jan Hammer, Fubini has been shoring up his portfolio. He discussed his reserve analysis:

“We’ve done reserve analysis and know that it’s different for A round firms than for seed funds. We’re allocating 10 or 15% more because we’ll have to do ‘seed-2’ rounds. Having been at A round firms, you’d need to allocate more capital because larger companies will require more capital. The late stage funds are a different universe. We’ll see improved pricing (lower valuations). It’s been two weeks, so nobody really knows what the repricing is going to be.

As a solo GP, I’m trying to make good decisions. Having been a partner at funds with multiple partners, there’s an effort to get to consensus and that could involve table-pounding. That shows up in pricing across a portfolio as, for instance, partners try to resolve what pricing should be ("Should we make an aggressive offer,” or “where’s pricing heading?”).” 

Florian Heinemann, PhD, co-founded Project A (a Berlin-based early stage VC), and was a serial founder before becoming a visiting scholar at Wharton and a VC. Nicknamed (among German venture/startup cognoscenti) “Professor of the Internet” (see WSJ Accelerators, 2015), Heinemann “was Co-Founder and Managing Director of JustBooks/AbeBooks, in charge of marketing and product” (1999-2002, exit to Amazon in 2006). He described to me (March 16) his team’s reserve analysis, factoring in governmental reaction to the crisis:

“The whole week for us at Project A is currently being dominated by assessing which portfolio company is hit by this to which degree and along what timeline and drawing our conclusions from this. Moreover, we try to understand which government schemes that have been announced last week will actually work in what way (whether portfolio companies are eligible etc.). Not finished entirely yet, but it's clear already that with very few exceptions (e.g. companies in the tele health space) we recommend that runway and the factors influencing runway are the most critical things to look at. And sure, we have always maintained an internal list of assessment of value potential of the whole portfolio and will certainly prioritize according to that when we need to because third party funding will become more difficult.”

Another friend who has been a venture and growth investor since the late 90s helped illustrate how VCs who’ve seen a “system shock” economy are applying their experience to the current situation: “Things can turn really quickly. I remember being on the board of a company in 1999 that did web sites for companies. Within one quarter, their pipeline went from robust to zero. They went bankrupt in a quarter.”  He also shared with me what so many VCs have advised: reforecast down: “We’re advising our portfolio companies to throw out existing forecasts and plans for 2020 and plan for a much tighter capital environment and far less growth. It will impact different companies differently. If you’re a lending business, you’ll have a much higher default rate.”

Of course, VC firms aren’t limiting their introspection to their own portfolios, as they also focus on the outlook for fund performance and inflows (into funds) of capital going forward. Aaron Holiday cofounded 645 Ventures in New York. His “high level takeaways” (March 16) include how this will prolong the time to liquidity for current funds: “The current market cycle is likely to have an impact in venture capital fund vintages from 5 – 8 years ago because those funds should be in the upward trend of their j-curves. The funds will have companies that are starting to consider large imminent M&A and IPOs. These exits will likely slow down for the next several months until there is more stability in the global economy. Therefore, those large, growth companies that could return VC funds might need another growth round to weather the storm and get to exit.” 

Exits: Speaking of exits, companies in M&A processes will face a bumpy ride. In contrast to venture and growth rounds (which we’re seeing people consummate without massive re-trades, so far), the bankers to whom I’ve spoken are reporting “stalled mandates” and concerns over deals being paused, more with respect to deals with public company buyers than deals with financial or private equity buyers. As New York-based Ian Sigalow, co-founder of Greycroft Ventures[3] (New York and Los Angeles), explained (March 19): “In environments like this, where public equities are trading way down, private equity firms have an upper hand when it comes to M&A. PE buyers are not susceptible to daily mark-to-markets on their portfolios and can therefore have a longer term view. There will be exceptions where public buyers continue acquiring companies, but that takes real courage. Many public company CFOs are risk-averse by nature.” At our law firm, we’ve continued to see deals close. We’re also watching larger deals announce, such as Insight Venture’s $1.15B sale of cybersecurity firm Checkmarx to a PE Fund (announced March 16). My conversations, however, reveal distinctions between deals to which the parties have already committed, deals which buyers feel they cannot abandon (for legal or other reasons) and deals based on the stock price of the buyer.

Denominator Problem: Sigalow’s comment about venture firm’s not ‘marking to market’ raises another concern that rippled through a number of the conversations that led to this column, the “Denominator Problem,” which we witnessed in 2008. As Ira Weiss explained:

“Institutional LPs will run into the same issues they had in 2008. If you used to manage $10B and the market declines and you now manage $6B, the percentage allocated to private equity has now increased relative to the whole portfolio. They’re really not going to look at new managers. If you’ve done really well as a manager, they will probably re-up but may reduce commitment amounts. This will bleed backwards into the venture market. This is happening at a time when Softbank has already had a lot of trouble and people had not really modulated for that yet, but now they will.”

In other words, the large institutional investors who invest into venture funds are likely to feel “over-allocated” to the venture asset class because their total asset-base has just shrunk via the public markets. Because VCs do not ‘mark to market’ on a daily or monthly basis, the declines will not be as rapidly assessed. A senior VC expressed the view over the weekend, “there’s no venture valuation in the last six months that’s meaningful today’ as we’ve just experienced an industry-wide repricing.”

Consequently, Aaron Holiday anticipates a downturn in venture activity: “Fundraising for new funds in 2020 and 2021 might prove to be more difficult as asset managers think about rebalancing their portfolio and/or protecting their assets from the current volatility in the market. This means that VC investing could slow down in 12 – 24 months after the most recent wave of funds (i.e. 2018 and 2019 vintages) are fully deployed.” That would be similar to the “cash overhang” venture experienced in 2000, which (combined with other factors) to lead to decreased aggregate dollars flowing into venture funds in the subsequent years.

Capital Into Funds: The Denominator Problem speaks to capital inflows into venture funds over the coming years, but I’ve also been watching near-term capital inflows. Since the pandemic’s onset, venture funds are quickening the pace at which they’re “calling capital” (i.e., asking their investors to fund the commitments those investors have previously made to the fund). I’ve also seen a number of the smallest seed funds (under $15M in assets) call 100% of committed capital. The only reason to do that is if the human beings managing the venture fund feel anxious about the ability to “call capital” over time — it’s a bit like a run on the bank or panic-buying all the toilet paper you’ll need for the next six months. We’re watching to see if this becomes more prevalent or spreads to larger funds. If so, that could signal panic. I’m also seeing more established funds doing what Ross Fubini described — shoring up capital for their portfolio – as one capital call arrived in my inbox this morning (March 23) noting “Even though the company has significant money in the bank they have decided to accept capital due to the current environment;” with another (also March 23) saying: “You should expect that we will continue to call capital through this crisis.” That’s rational behavior: it speaks to the risk analysis/stack ranking that VCs are doing, as well as desire at good companies to accept terms now as the eventual price/terms will likely be worse. It also underscores what some VCs described to me as a “flight to quality,” where investors want to get into the very best companies (which may have been hard deals to “win” in the prior market) right now.

Credit Markets: We’re also watching companies drawing down their lines of credit because they believe (1) interest rates/borrowing costs are low, (2) they’d rather have the money in their own account than at the bank, and most importantly, (3) there’s a concern that banks will likely – at some point soon – grow anxious, which could chill (or freeze) the credit supply. This harkens back to PJ Parson’s comments regarding 2008. In other words, companies are paying (low) borrowing costs now to avoid worrying later that banks might not disburse previously promised loans. As one senior venture lender explained, “It’s a risk factor to us if someone comes early to ask for [all the] money [on their line]. There should be some sense that they’re tracking, but it’s hard to see how well companies are tracking in this market. You’re representing that the plan you are showing me is accurate.” That’s not to say that credit will dry up, but lenders are cautious about panic-driven moves.

Concerns about the anxiety stemming from the current crisis are also underscoring the importance to investors and founders of guidance from those who’ve successfully steered through dismal markets before.

4. Premium on Experience & Existing Relationships, Especially for New Deals

A senior VC discussing the premium on experience, commented that the vast majority of today’s VCs were not investing in ’08, while another noted: “If you aren’t over 40, you likely weren’t managing risk/people” during the prior downturns. Many VCs shared stories of broken deals from the prior downturns and how that shaped experience and reputations, as people remember those who walked away in the middle of a deal. Several senior investors remarked that VCs “will focus on their own portfolio companies,” which comports with my experience during prior market declines.

Arlan Hamilton has, famously, endured her share of adversity; much has been written /reported of her ascension from homelessness to starting her own VC firm, Backstage Capital, which has a global reach and locations in the US and Europe. She’s also an author. We spoke Sunday (March 22) from her home office in Los Angeles (during which she interviewed me for her podcast, released that day). She feels “people that have been through quite a bit are able to at least broadly handle the beginning of what this is a little bit easier than others. They’re having an easier time of this and aren’t as anxious as some others. It’s ironic because those same people are probably even more affected adversely by Coronavirus.” Her comments (much like those from many with whom I spoke) were infused with emphasis on the human rather than purely financial component of the present pandemic. Hamilton said: “my North Star is getting to the other side of it with all of us intact.”

The preference for working with those who have experienced market turmoil previously also spills over to which new deals and partnering arrangements will make the most sense. One senior VC shared, not for attribution, that they’re “still taking a lot of meetings, but we're hoping founders will focus more on partnering with experienced seed investors who will help them navigate the next two years with a more rational burn expectation, rather than optimizing for high valuations and planning to spend and raise again quickly.” Similarly, several senior investors shared– in various formulations – a version of: “How do you make investments when you’re just not physically meeting with people? VCs want to physically interact.” In my role as counsel, late in the week a senior VC asked me how their team could diligence a round we’re doing for them, without being able to visit the company and kick the tires.

In response to these dynamics, Fubini advises founders to make it a priority in fundraising to "[t] alk to people that already know you. It’s really hard to do new investments. I am conducting one solely on Zoom, but I know all the investors. It’s going to be very hard to do things with people you do not already know.”

Maurice Werdegar started working at Roberston Stephens & Co. three weeks before the collapse in 1987. He joined WTI (Western Technology Investment), a leading venture lender in the Bay area, in January 2001 and has served as CEO for more than a decade. When we spoke on Saturday (March 21) from his home in California, he contrasted deals in process versus new deals:

“It takes a while for the venture community to catch up to reality. For example, they’ll continue to process most of the deals they’re working on before this happened. Deals are still moving forward but they’re being renegotiated - changing pricing or terms, but not pulling out. It’s easy to not meet with people [to assess them and their deal] when you’ve already met them. The slowdown will come in the second half of the year, when the venture community steps back to assess what’s in their portfolios and which of those make sense in the new world.”

Opportunity: Yet, Werdegar, who is also an investor in a number of the venture funds with which he does business, sees opportunity: “Historically, we’ve gotten into our best companies during tough times, because we still have capital. The firm goes back to 1981, so we’ve been through multiple cycles. We have to maintain a consistent cadence through the market, but the quality filter is higher. I would bet that they will be some of the better deals we will do.”

A number of investors with whom I spoke addressed this point. London-based Ophelia Brown founded Blossom Capital, for which she recently raised Fund II ($185M). According to Tech Crunch, “Citing benchmark data from Cambridge Associates and Preqin, Blossom says it sits in the top 5% of funds of 2018/2019 vintage in the U.S. and EU.” Brown and I caught up on Sunday, March 15:

“Good investors know early stage investing is about having a long-term time horizon. We will see through bad months/quarters for the longer-term opportunity. Think of all the great businesses that started in the last bear market - Airbnb, Stripe, Square, Uber; the list is very long. A sustained period of dislocation and change of behaviours will create so many opportunities and those who pull out [of] the market will miss them. I would expect all the good early stage investors to be doubling down right now and making a continued show of it, now and in 8 months. If a potential investor is being short-sighted, they're the wrong partner. Lots of capital is going to be flushed out in this market, but it's probably a good thing.”

This also highlights the dichotomy of early stage / late stage. Deven Parekh, A Forbes Midas-Listed Senior Partner at New York-based Insight Partners, a large growth fund, explained (March 16) it this way:

“…in the main, people are going to pull back as there is no way to know the demand curve right now. I think and hope that in 6/8 months there will be a great investing opportunity. If markets allow us to get into a great company that we wouldn’t otherwise get into. We would do that. Also, I think early stage [venture] firms …, which are investing pre-revenue, probably see more of an opportunity to do Series A [financing] at rational prices.”

5) WHAT TO DO:

So, what should you do? Or, if you had these folks as your lead investor/board member, what guidance would they provide?

SAFETY/TEAM: Jan Hammer (March 19):

“Well the guidance is (beyond remain safe, look after your people first and foremost) ... the discussion with each CEO is about rising to the occasion - how can he or she show leadership and step up in this difficult time, looking after employees and customers, extending product to more users, giving some product free for a transitory period, or spotting the best talent to hire that was unattainable before. We try and work with every CEO to turn this difficult time into an opportunity, resilience and lasting business value.”

Be mindful of the fact that, as Florian Heinemann explained, in an anxious market “psychology/mind is stronger than fact-based decision making - that is unfortunate but undeniable.” People will need a steady hand.

FUNDING: As already stated, having cash or securing access to funding are critical, whether you’re an investor or a founder or simply assessing your own employer’s prospects. Florian Heinemann: “runway and the factors influencing runway are the most critical things to look at…because third party funding will become more difficult.”

REFORECASTING/WATCHING OTHER GEOGRAPHIES TO LEARN HOW SITUATIONS WILL UNFOLD: As companies consider cash, they will also reforecast. I have been on many board calls and email threads in the last week, where guidance is to cut forecasts by about a third. For instance, from PJ Parson:

“The right strategy for most startups is to examine assumptions of market (sales) volume and slash by at least 30% and then build a new cost-base assumption around that. If that turns out to have been wrong, nobody else will overtake you because nobody else will have lots of resources to swamp the market, and you'll be well-positioned to raise capital when we find the new market equilibrium.” We will see this unfold differently depending on governmental reaction and the structural support/economies elsewhere, but that learning will be important. Jan Hammer: “Based on what we are seeing (medical evidence aside, and race against the clock to get vaccine out) factories in China are getting back up and running, and transport recovering. That's some two months later, as a precedent for the western world that got hit with a delay and is now the epicentre of the outbreak.” Hammer was quick to note: “The swing from the peak towards the trough and (hopefully recovery) looks exceptionally fast. Therefore, general panic and things simply seizing up is main worry. That was a wild impact on GDP and earnings that we (markets) are probably still massively underestimating. As a result, my personal view is that we are in for another major trough (33% down from here? who knows) with a big dislocation yet to come. You need a massive coordinated fiscal stimulus to get out of that hole to kick-start the economy. Likely recessionary impact for a few quarters but market recovery may (but may not) be strongly up if sunshine in northern hemisphere in some 3 months sorts this, or if there’s a prospect of a vaccine.”

Simplicity is Conducive to Speed in Deals: My Lowenstein partner, Ray Thek, advised avoiding the temptation to overcomplicate deals, as financings will need to move swiftly. The temptation to structure for protections in every down scenario will result in extended negotiations and delay is not your friend when you need to close on new capital.

Shifting From Offense to Defense: It’s tough to market/sell during this period and you will find that ensuring you’re in touch with customers will be important. Considering new approaches and getting user adoption in the marketplace could be helpful. One investor suggested to me that he’s urging portfolio companies to provide products for free, which a number of companies are doing – including media companies that are temporarily taking down paywalls.

Remote Teams: Acrew Capital published good guidance on some best practices for remote work.

Living with the Uncertainty: Ophelia Brown shared some advice, with which it makes sense to end: “I started my career watching people of all tenures lose their jobs and quickly learned that nothing is for certain or secure. one must be able to ride out tough times to survive. Being able to deal with uncertainty and unpredictability is the strongest test of character.”

Wishing the best to all in these very difficult times.