I have three adult daughters and two granddaughters.  By far, I worry most about their personal health safety during the Coronavirus outbreak.  But I’m also worried about their personal financial security, and that causes me to think about the financial health of the companies they work for. 
Startups are used to dealing with basic financial survival, but many that I talk to during these interesting times are more concerned than normal because they don’t know if their vehicles for funding their company are still available.  Following is my personal assessment of the effect the Coronavirus outbreak will have on startups that need, or soon will need, additional funding to continue operating. 
If my opinion changes as time goes by, and as I gather more feedback from fundraising startups and investors, I will post again to this page.  I hope this is helpful in some small way.  Be safe!

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March 15, 2020 (original post)

The immediate impact to startups will be a slowdown and delay in funding activity while investors of most types try to decide for themselves how much worse things will get and how long the situation might last.  The slowdown will also occur simply due to the increased difficulty of travel and recommended social distancing.  Videoconferencing only goes so far when it comes to investor interactions.

Angel investors and family offices will be much more conservative as they deal with the value of their personal investment portfolio dropping quite a bit.  However, after venture fund managers have a month or two to figure out how bad things might get, I’m of the belief they will continue to invest at a similar pace as before the crisis.  That’s because a fund manager for a traditional 10-yr fund needs to deploy their LP’s capital within the first ~3 years of the fund to optimize their IRR and other key fund performance metrics.  They can’t just sit on the sidelines for a year.  The question is whether they’ll prioritize the use of their capital to help companies they invested in from their prior fund(s), thereby protecting their portfolio and potentially investing at a good valuation for the benefit of the LP’s in their current fund.

My opinion on venture funds would change quite a bit if the economy and stock market get so whacked that it causes fund LP’s to decommit on their capital calls, like happened in the years following the Great Recession.  I’m also nervous about venture funds that have completed their initial close and started making investments, but haven’t yet reached their final close.  Those funds will need to recalibrate their investing amounts and frequency.

The longer this “new normal” continues, the more the balance of negotiating power will increasingly swing to the investors’ favor.  This translates to more aggressive and investor-friendly terms (we might start seeing 1.5-2.0X liquidation preferences and the like) and lower valuations.  But I believe Silicon Valley valuations will take a far bigger hit than the middle of the country, where startups don’t typically experience wide ranges of increasing and decreasing valuation.  Instead, their valuations tend to remain pretty steady throughout.

I hope this helps in some small way.  Be safe!

Read my advice articles on startup fundraising here

March 18, 2020 (Investor Sentiment)

I’ve spoken with lots of founders over recent days.  They are all seeking some way to conceptualize investor sentiment and activity levels over time as the outbreak and its impact to society runs its course.  Below is a 3-phased visual to better understand my early assessment.  Unfortunately, it is too early to assign time frames to each phase and that’s the biggest contributor to investor paralysis.  I’m also sure there will be exceptions to my assessment.

coronavirus affect on investors

I hope this helps in some small way.  Be safe!

Read my advice articles on startup fundraising here

March 20, 2020 (Catching Investors’ Attention)

How do you catch an investor’s attention at a time like this?  Well, as I posted before, I’m of the belief that pretty much all venture-style capital from angels and VC’s will be on hold at least until there is some visibility to when the peak of the outbreak will be reached.  So, I’ll answer the question by assuming we are in the phase after that and mostly in relation to institutional investors rather than angels.

Runway
Startups that have a year of runway won’t desperately be fundraising.  But startups with less than 60 days of runway are going to have an unbelievably difficult time because of the added risk the investor would be taking on.  It’s true that the desired funding will mostly be used to extend the runway, but at times like this investors will want to make sure a sufficient amount of capital is fully committed before they actually write their check.  That probably means they’ll want you to secure 18+ months of runway.  That also means seed rounds and bridge rounds with rolling closes and convertible securities will inherit the “initial close” concept from equity funding rounds, whether it’s written into the docs that way or not.

Revenue
Maintaining flat revenue during a crisis like this should be impressive to investors.  The saying “flat is the new up” will become common.  And if other fundamental KPIs are holding together, I could imagine some scenarios in which moderate revenue declines seem OK to investors.

Churn
Maintaining churn rates in the range of 10-12% on an annualized basis (not monthly) will seem extremely impressive and 18-20% might even be acceptable.  But a lot of this depends on the rate of new customer acquisition to offset the churn.

Target Customer
Investors’ assessment on this front will vary greatly based on the type of customer you sell to.  Those that sell to the government and military are probably feeling pretty good right now, especially those that are under a multi-year contract of some sort.  Those that sell to consumers are more likely to be in big trouble.  That leaves those that sell to commercial businesses of all sizes.  If your solution doesn’t save them money or make them money almost immediately, you’re in trouble because, for some number of months at least, businesses won’t spend even $1 if it doesn’t accomplish one or both of those things.

Variability of Spend
Investors will enjoy it if you have some remaining variability in your expense budget.  They will be concerned if you’ve already significantly cut your staff and other growth-related expenses and the only remaining lever you have is to cut more staff.  That’s what is referred to as the “death spiral”.

Urgency
At a time like this, why shouldn’t investors just wait a while longer?  If you have other potential lead investors or some other reason for the investor to make a decision sooner versus later, you’re very fortunate.  Be prepared for investors to give you more homework assignments after each meeting rather than telling you “no”.  Why should they make a decision they don’t have to make?

Read my advice articles on startup fundraising here

March 25, 2020 (The Color of Your Revenue Forecast)

Investors will drill harder than ever into your revenue forecast.  I’m not just talking about the numbers you present, because that’s obvious.  I’m also talking about your possible sources of revenue and the viability of the methods used to generate it.  I’ll break this into three segments:

  • Revenue Preservation – You’ve heard the saying “a dollar saved is a dollar earned” and this definitely applies to a time like this.  A dollar churned requires a dollar newly-generated to offset.  What can you do to preserve any existing revenue you have?  This assumes you have a recurring revenue model of some sort.
  • New Revenue from Existing Customers (farming) – These customers already know the benefits of your offering and they trust you.  Can you sell them more of the product they’ve already bought (upsell) or sell them additional offerings on your menu (cross-sell)?
  • New Revenue from New Customers (hunting) – This is the hardest of all.  The prospects don’t know you and you have to go through the full sales cycle with them.  And if you use a field sales model rather than inside sales or self-service, it’s going to be infinitely more difficult while the world is on high levels of alert (travel restrictions, employees working from home, etc).

Don’t just think about this when you present your forecast to investors.  Assuming you’ve been able to maintain low churn (preservation) and have a viable strategy for maintaining that, make sure to proactively mention it.  If you have a history of upselling and cross-selling to your installed base of customers and have a viable strategy for maintaining that, make sure to proactively mention it.

I hope this helps in some small way.  Be safe!

Read my advice articles on startup fundraising here