To our Dedicated and Gritty Entrepreneurs,
I am sending this letter with the hope of providing a little solace and possible calm about the current business landscape.
About this time I think it's safe to say we may not be the only one scratching our heads wondering what's next, what is going to happen and how will we get through this? Well, the good thing is that it's happening to all of us! Whether you have been an entrepreneur for 30 years or 2 months, it's still happening. While there are several things we can think the worst of, better to think about all the amazing things we have done to get to the place we are in now!
1. Launched a business that you believe in ....CHECK!
2. Overcome the tumultuous tactics of getting capital from friends and family, angel investors, family offices, VCs, banks, silent partners, loud partners, and in some of your cases - mobsters...CHECK!
3. Patiently dealt with customers, vendors, family and friends as you grew your dream and business into what it is today...CHECK!
4. Slowly, over time developed a better understanding of who you are and what you want in life and had the guts to do it...CHECK!
Knowing the above makes you a step above the rest and allows you to operate with the vivid understanding that you are tenacious, stalwart and have the ability to get shit done!
We will remain together, fight together and stand together as we continue to build amazing companies that are solving difficult problems.
Now that we got that out of the way...
As an entrepreneur, it's time to shift your mindset. Last month might have been about growth and daring new initiatives. It could have been about closing a new round of capital and hiring new employees. Last month was about shiny things. Growth was your religion, and your thoughts were all about innovation and driving revenue. Unfortunately, we woke up in a different world, one in which the majority of the population is shielded from normal social life due to the spread of coronavirus. This new world means we are now under new rules. Your new religion is now survival, and your new God is called liquidity. A few suggestions to help you and your companies navigate during this unknown world.
Dump your 2020 strategy and take out a blank page
Most 2020 plans were created based on more or less a normal worldview. None of you had a "global pandemic" sections in your financial planning sheet. New realities call for new plans.
Create safe work environments by working from home
Most all of our clients have sent their employees home to work remotely, and those that haven't, should. You do not want to get press like the CEO of Charter is currently getting - he should be punished for this -arstechnica.com/tech-policy/2020/03/charter-faces-blowback-after-banning-work-from-home-during-pandemic If you have a significant other and kids, realize their daily schedules have also shifted, be nice to your spouse and kids. Explain why you may need a few hours alone each day.
Err on the side of communication
Turbulent times call for different levels of communication. If you have a large team, consider a town hall style of communication where you as the CEO address the entire staff with updates and then answer questions. Also schedule one on one's with team members to keep them calm and focused.
Establish a War Room
Bring relevant people together to make quick and decisive decisions regarding the virus and its impact on your business and team. You should assemble your co-founders and management team regularly to review new information and make decisions.
Understand that your revenue will be impacted - for the majority of you in a negative way.
Your sales have likely already seen an impact. A few of you, your revenues should soar. Two of our portfolio companies are actually doing extremely well (Streaming Global and HFactor)- but most of you, your revenues will temporarily stagnante or decline. The new reality is you can control your top line, so better prepare to wok on cash collection and cost structure.
Calculate your runway in multiple scenarios.
In every crisis, cash is king. The opposite is also true. Look at your cash position today and calculate your runway based on lower revenue scenarios. The shorter your runway, the more drastically you should consider executing the following actions. If you have more than 12 months of runway, even in the average-case or worst-case scenario, you have enough time to observe and could allow yourself to course-correct first in a couple of months. If you are between six and 12 months, you should be very cautious and have a contingency plan ready to execute. If your runway comes out under six months in the average-case scenario (which will be the case for a lot of you), the time to act is now.
Don't count on new funding from VCs.
Following the financial crisis in 2008, venture capital investments fell sharply, by over 50% from their peak in 2008. It took over two years before funding got back to the old level at the beginning of 2011. Think about it from the VC perspective: Hoarding cash in times of uncertainty might be the dominant strategy. Nobody wants to invest in a “falling knife,” even if the macro environment causes it. So don’t count on VCs to equip you with enough liquidity to steer through the crisis. The good news from our perspective is that while we work closely with a few VC firms, the majority of our relationship capital is with Family Offices and HNW who are more opportunistic investors. We actually sent this update out to them earlier this week: va2.co/katz-s-korner Openly address your concerns with your potential partners and get a realistic picture of whether they can and will invest or not. If you are currently negotiating with our capital sources - and others for that matter - reduce your expectations on story-based valuations. It might be time to take money (even small survival money) at any valuation.
Pull in cash from all sources
Focus on the most common action steps to preserve and pull in liquidity in times of crisis. It won’t be easy: A lot of other companies are in the same situation as you are, so acting quickly and decisively is paramount. Here are a few ideas:
Credit. If you can draw on any committed line of credit, consider doing so now. Whether it’s from your bank, your investors, or something like a PayPal business loan or Kabbage line of credit, it’s better to activate it now before the systems get overwhelmed, or programs are being pulled.
Accounts receivables. Your customers might start to become low on cash in the future, so better talk to them today about outstanding invoices. I’ve heard from multiple sources that payments from customers start to become late due to the simple fact that accounting departments are understaffed. Best practice in those kinds of situations is to calmly and pleasantly call customers one by one, figure things out, and collect as much cash as possible early on. On top of the regular collection, consider offering discounts or better terms for customer prepayments.
Accounts payables. Wherever possible, try to renegotiate longer payment terms and defer payments. Implement payment plans over multiple installments, if possible. Go through your suppliers and demand concessions now. Of course, they won’t like it, but they probably expect such calls already.
Taxes. Delay tax payments as long as possible. Some governments have already implemented looser rules on tax collection. Utilize those to full capacity and maybe even accept penalties for late payments in exchange for not paying today.
The majority of our portfolio companies are technology related. However some of you have inventory. Now is the time to Decrease Inventory. You do that either by ordering less new stock or selling what you have, even at discount prices. It can be an excellent opportunity to clean out your warehouse and generate cash, even if it means sacrificing margins.
Create a cash-conserving plan through cost-cutting
I had to do this for two former companies I founded - it is never fun to do, but better to be prepared now than to feel sorry later. Look at the cost breakdown of your profit and loss statement, start with the most significant items (usually payroll or marketing), and work your way down. Ask yourself where your biggest levers lie to preserve cash and cut costs. For each of your scenarios, you should plan on which costs to cut in case revenues fall below the respective threshold of the scenario. Here are the most common things to look at:
Rent. Can you lease less space during the crisis?
External suppliers. Which projects can you reduce or postpone?
Working hours. It’s always better to reduce working hours and keep people on staff instead of just letting them go. It usually works pretty well, and people understand it in crises if it’s well communicated (meaning overcommunicated).
Headcount. How can you achieve the same with fewer people? It shouldn’t be your first choice, but be prepared to know what scenarios and revenue levels would force you to execute layoffs.
Founder salaries. Any flexibility here to support the business?
Product and R&D. What projects or product launches can you postpone to save cash?
Watch your marketing spend and ROI
With conversion rates dropping and revenue meetings not happening, your customer-acquisition costs might soar through the roof in the near term. Also, higher customer churn and shortfall on payments can lead to lower customer lifetime values. Watch both metrics meticulously in your war room meetings. Adjust your spending according to your new reality. In some cases, increasing marketing budgets and generating more revenues might work out. More commonly, however, saving the budget will produce a longer runway.
Opportunities will still be there in a couple of months. There is no need to rush unless your core business is doomed. If this is not the case, focus all your energy on stabilizing and preserving what you have built so far.
Keep a close eye on CAC and CLV and make daily adjustments to your spending. If you’re currently low on cash (less than 12 months of runway in your average case), it might make sense to raise the bar on “required ROI” from each ad or sales campaign to make your marketing more profitable in the short term.
Check out government aid programs and talk to other entrepreneurs
Depending on your local administration, there might already be measures in place to stabilize the economy. A variety of actions I’ve come across in the past couple of days include 1) deferment of tax payments; 2) a reduction in working hours of employees and a partial refund of salaries by the government; 3) “rescue funds” for specific industries (like hospitality) that provide uncomplicated loans; or 4) a loosening of bankruptcy laws and reduction of personal liabilities.
The easiest way to learn about those kinds of programs is to talk to other entrepreneurs. In the past couple of days, many WhatsApp groups have formed around sharing best practices and figuring out access to those aid programs. Join the conversation, ask others for help, and share what you’ve learned yourself.
Inform your investors about the situation
With all the daily challenges, this one might slip your mind, but you should communicate your plans to your investors. Include your runway and a general overview of how the coronavirus situation will most likely impact your business. If it’s really bad and you’re going to need new money fast, let them know early. If you have bad news, better deliver it quickly and in a thought-out manner.
Also, very important before you dive in to business talk, ask how they are doing and if there is anything you can help them with!
Tone down the optimism
You are in the middle of a crisis. Prepare, act calmly and cautiously (but decisively), and handle it with care. Avoid inconsiderate hectic rushes and make sure you’re holding it tight if disaster hits.
We’re all hoping the current situation will not be as harmful as it could be to people’s health and nations’ economies, but we also know that as entrepreneurs, we tend to be a tiny bit overly optimistic in times. Consider temporarily dialing that optimism down just a little bit for the next couple of weeks.
VA² is here to continue to help, in all aspects of our engagement. Reach out at anytime, 24/7. In addition, we are going to host a town hall meeting Wednesday, led by Randall Foster. Randall is our newest Equity Partner and has significant VC and business experiences. He has lived through multiple cycles. Invite will be sent shortly.
Heads up high, we will all get through this.