Andy Katz is the Managing Director of VA². The opinions expressed on this site are his own and not necessarily those of VA².
Memo sent to our Family Office/VC/PE Partners
This memo was sent out 3/17/2020 and generated significant interest thus I thought I would share here as well.
Dear Family Office, VC/PE Partners,
No question we are surrounded by uncertainty and fear that’s impacting all of us on a number of levels. I want to share our thoughts on where venture investing fits in the current business environment and how VA² is well positioned to positively impact your portfolio.
What a ride… The VA² team has accumulated more than 60 years as venture investors and as operating executives in companies ranging in size from startup to Fortune 100. We fortunately have ridden the roller coaster of 1990’s peace dividend, internet growth, 2000’s dotcom bust, 2008 real-estate bubble caused financial crisis, and recent extended bull market of the last 11 years. Grand sums of money have been earned and other fortunes lost. Most importantly, we have seen extraordinary innovations brought to market from countless newly established companies that have brought wealth and notoriety to founders and investors in success stories such as Apple, Google, Amazon, Qualcomm, Netflix, Tesla, Uber, and more. And yet, something so small and invisible as a virus spreading from literally the other side of the globe can dramatically change the global economy. What a shock to the otherwise Great American Innovation Engine.
This crisis does feel different, given the speed and scope at which the coronavirus has affected lives and economies in almost every country on earth. It’s clearly a grand disruption on a scale not seen in 100+ years, if not ever before. It’s the black swan no one predicted. Work, play, health, food, travel, family are all affected. Yet, us humans are adaptable and resilient. I’m confident we’ll take care of our loved ones, watch out for ourselves, our communities, our friends, find a way to stay productive through work, and do what it takes to help society recover. This may take weeks or months, but hopefully not years.
We love venture investing even more… While it may appear counter-intuitive, this is a promising time to be venture investing. “Buy low”, as the old adage says. This is especially true in early-stage investing. When economic times are tough, it’s an investors market. Young companies are always consuming capital. But when under duress, capital is in higher demand and entry prices are lower. “Sell high”, as the same old adage says. The time to sell a share in a private technology company (or exit through public listing) is when companies are in high demand. This is inevitably several years or a business cycle away. It’s not now. This is a buying time, not a selling time.
Everyone’s situation and outlook is driven by a complex formula with lots of ingredients. I can’t suggest a single solution or direction for you. I can share my team’s constructive comprehensive thoughts during this economic downturn. These are the times when great investments occur. The seeds of the next Amazon or Google are being planted now. Shocks to a system can create new ideas and opportunities. And it’s the people experiencing this that can launch highly successful future companies.
Past cycles and history show that venture investing is relatively isolated and uncorrelated to public markets. We encourage all investors to allocate a portion of their portfolios to the venture asset class either through funds or individual companies. These can not only produce an outsized gain in the long-run, but also provide valuable portfolio diversification. Irrespective of what’s happening in the public markets, venture is an illiquid asset class with a five to ten-year horizon. It’s the long-term nature of venture investing into visionary projects that creates the potential for enormous value appreciation, regardless of current market dynamics. But often when the economy is down, when the world has changed, the emerging new sparks of ideas drive the next economic cycle upward.
Take a leap… Downturns give venture investors more leverage and choice because often the value of early-stage companies without even a product in market or at early growth stages are carried downward along with public market established companies. Family Offices can deploy capital at lower valuations, can access more deals, and can be more selective with their investment criteria. The external economy has little impact on near-term venture company progress. We know that many dynamic early growth companies we work with are evaluating their forecasts and adjusting their plans. Quality management teams are pursuing newly available talent and more open distribution partners. Founders are seeking focus and efficiency, to accomplish more with less.
As providers of strategic capital, relationship capital, and operational know-how, Family Offices are uniquely positioned to bring tremendous value to early stage companies. Seeding and cultivating that innovation foundation is what makes America the most successful economy ever. Family Offices’ venture portfolios and investments are the engine that drives this force.
What We’re Doing… VA² is hunting for exceptional ideas, unique products that solve valuable problems, capital efficient business models, companies that take a product to market, and gritty entrepreneurs who can navigate the choppy waters trying to sink a young venture. We are well positioned to provide a steady stream of qualified new investment opportunities to you and your team. We’ll look for seniority in capital structures, revenue share models, debt protection, and other creative terms to help protect our Family Offices should the uncertain macro environment persist.
Additionally, VA² is able to assist your existing venture portfolio companies with creative ideas and meaningful relationship capital to attract and close badly needed revenue streams from new customers and new markets. If we have not already been introduced to your portfolio management teams, now is the time.
In Conclusion... Managing investments during greater uncertainty requires more discipline, greater access to opportunities, resource leverage, conviction that the cycle will turn positive again, and that the great America Innovation Engine is still going strong. We aim to be your partner to best deploy your time, money, relationships, and energy.
Turning from the business aspects to the personal, our hearts and thoughts go out to the people who have been affected by this unprecedented event. We appreciate the healthcare workers, local communities, and governments around the world who are on the front line working to contain coronavirus.
Memo sent to CEOs & Founders of our Portfolio Companies related to coronavirus & economy
This memo was sent out 3/17/2020 and generated significant interest thus I thought I would share here as well.
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
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.
My America, Troubling Winds
Post from when I was CEO of GridQuire Labs
There’s been a lot of talk about immigration in the recent months. Some of it constructive, but a lot of it emotional and misguided, in my opinion.
Here’s where I come from: I’m a CEO in a field heavily related to - technology - that has benefitted greatly from the contributions of immigrants. And I’m the grandson of a man and a woman who fought hard to escape the Nazi Holocaust and started a new and productive life in The United States.
So, yeah. I’m a little biased when it comes to the subject of immigration. But bear with me.
No matter how we got here, most of us — or someone before us — got here from somewhere else and began to put down roots in this sprawling nation. Our bloodlines trace back across oceans and borders, even though many of our families have been here for years. Centuries, even. We started somewhere else, but today, we’re Americans.
As a country, for hundreds of years, that’s been true. And, for hundreds of years, despite occasional flare-ups and push-backs, we’ve accepted that as part of what makes The United States the greatest land of opportunity in the world.
But lately, our memory has been getting hazy. We’re getting tied up in confusion and fear. And, while there are legitimate concerns about how to manage responsibly the flood of people from around the world who yearn to call this country home, it’s easy to turn the word “immigrant” into something dark and sinister, as some have started to do.
It’s happened before. Throughout our history as a nation, though we often eventually ended up in a more enlightened place, those of us who were already here didn’t always greet the next waves of immigrants with open arms, choosing instead to laugh at them, vilify them, demonize them and, even, legislate against them.
It’s happening again. And, again, it’s time for cooler heads to prevail.
Think about this:
In the 19th and 20th Centuries, waves of immigration led to the notion of America as The Great Melting Pot, where we honored our heritage while celebrating our status as new Americans.
Today, immigrants are growing our economy. Yes, at the bottom where foreign-born workers build our houses, roads and other infrastructure. But also at the very top, where immigrants have started more than half of United States startups valued at $1 billion or more. Half.
Immigrants are leading us to the future. Immigrants have been awarded 40% of Nobel Prizes won by Americans in Chemistry, Medicine, and Physics since 2000.
And finally, immigrants are learning how to make a better tomorrow, right here in the United States. Today, 77 percent of the full-time graduate students in electrical engineering and 71 percent in computer science at U.S. universities are international students. Many would choose to stay here in the United States, if they could.
In tech-related sectors, especially, we count on being able to tap into the minds and hearts of people from around the world who want to make this country and this world a better place. Whether they’re seeking personal wealth, a way to help others, or just a way to build a better game or ad platform, they know that this country is the place they want to be. Need to be.
But that notion will not last forever if we move from a posture of welcome to one of crossed-arms, staring across the border as if everyone on the other side is the enemy. If we say no too many times, the best and brightest around the globe might just decide to try their hand elsewhere.
And if that happens, we’ll be all the poorer for it.