”Even the greatest tragedies can bring the greatest gifts.” Brodie Whitney.
Recently, I was asked by Parallel 18 – an accelerator program here in Puerto Rico for which I serve as a Mentor to startup founders – if I had any advice to share during the Covid-crisis. Below are some of the quick takeaways I provided based on My Humble Opinions (MHO). In other words, while these notes are rooted in decades of experience, including investing into and through the 2008 Great Recession, they are mostly just that, my own experiences along with some anecdotal evidence and precursory research.
The times we are currently in are unprecedented (… or are they?) Here are my thoughts.
Strong businesses will always get funded. From what I have been hearing among my VC network in Silicon Valley, nearly every fund is staying the course and looking to continue investing.
It is easier for startups to raise money right now than it is for VC funds; therefore, startup investing should continue until the funds run out of dry powder. In the 2008 Great Recession, that wasn’t for about 18 months.
Personally, I signed an Angel term sheet earlier this week and am currently drafting another term sheet for ATO Ventures that I will likely sign in the next two weeks.
Speed may be impacted by logistics, even for “hot” startups. Quarantines are simply creating more hurdles than usual. For example, I had to have forms FedExed to me from our accountants in San Francisco because I couldn’t retrieve them from my San Juan office just a couple miles away due to a building lockdown. Likewise, many investors still are reluctant to go completely virtual. I have one investor whose policy is to have at least 10 hours of face-to-face meetings before signing anything.
Investors will also be looking for adaptive startups with founders who have clearly thought through potential, long term crisis scenarios and how they will address the new, post-Covid culture. How will your customers’ behavior change? Are there new opportunities for your company in new world? What used to work that you will now need to adjust?
On the downside, many companies will fail. For a handful, it will be a tragic death. For most, however, failure will not be a direct cause of the virus or the market downturn, but rather because the current situation uncovered weaknesses that were likely to kill the startup eventually anyway. Not the least of these weaknesses is an exhausted team that was already struggling to stay motivated. For them, the thought of working 10X harder will be unbearable, and the virus will offer a convenient, “honorable death” (since entrepreneurs still think one is needed rather than just letting a troubled company die.)
I would encourage startup founders to take this time to do a hard, deep analysis of the company and yourself. What do you honestly believe about your startup and what it will take to get it to sustained profitability (including paying yourself a market-rate salary). Do you and all of the key team members have the energy and willingness to put forth the needed, longterm time and effort; not to mention potentially putting personal savings and credit on the line?
If you do decide to keep going, you will need to do some careful planning. While most experts are advising startups (and larger companies as well) to cut costs and slow growth to conserve cash, I would suggest being very careful about making dramatic changes without true business reasons. In other words, this is definitely a good time to evaluate where you might have wasted spending, but do not slash solely out of fear. If the spending makes sense for growth that is still attainable, albeit perhaps more challenging, my advice would be to figure out how you can push forward and still reach your growth goals. You will need to get creative!
The scenario planning chart below was provided by Sequoia Capital. Startups can use this as a tool to help them think through the amount of cash they need to sustain for three, six and twelve month time-periods under various cost-cutting procedures. Even if you are not planning to make cuts immediately, this is a good exercise. I would also suggest establishing hard triggers on when to implement identified cuts, if needed.
For Incubators & Accelerators
In addition to the notes above, there are a few things that I think are important for you to think about as you serve startups in your networks.
I am a firm believer in the Fail Fast model, and support killing weak startups as quickly as possible. That is never easy for a founder; therefore, I would consider providing some sort of “grief counseling” for those that reach the conclusion that it is time to lay their babies to rest.
By that same token, I would look for ways for the stronger teams to absorb the entrepreneurs of failed startups. This is true for your current cohort and every cohort. I am a HUGE proponent of similar businesses merging. In this case, even absorbing talent into an unlike startup would be a success in my book.
Besides that, the advice is fairly obvious. Provide as much online support and counseling as possible. In these first weeks, I have found that teams are spending a lot of time spinning their wheels – literally pacing back and forth – trying to figure out everything from supply chain logistics to the more basic issues – like where to set up their computer at home, whether or not internet speeds will suffice, how to print documents, what to eat and when…. Life, not just business, has completely changed for everyone.