Coronavirus: Five things entrepreneurs should be asking their investors
Fundraising is tricky and time-consuming at the best of times — let alone when there’s a global pandemic. To maximise chances of success in these turbulent times, entrepreneurs with venture capital (VC) funding should remember that a VC is more than just an investor. Many have been entrepreneurs and operators themselves, have experienced uncertain times with their own businesses (like the 2007/08 financial crisis), and can offer support to help weather this storm. VCs are also usually investing institutional funds, so have their own investors to answer to too. To get the most from this relationship, here are some questions entrepreneurs should ask their VC now.
Should we continue with our existing business plan? If not, how would you recommend we pivot?
The answer is almost certainly “no”. Existing business plans are unlikely to be relevant in the current climate. You’ll need to start with a clear understanding of your burn rate and runway, then forecast how supply and demand for your business will evolve. Work out how you can operate on a constrained cash burn rate, getting to grips with any new financials and calculating how many days of cash are left.
VCs will be having this conversation many times over across their portfolio, so ask for benchmarks, ideas, references, and experiences. Be prepared to be agile and adapt your business or model as needed in this swiftly changing environment, and discuss this openly and frequently with your VC.
In the fitness sector, startups like ClassPass and BEAT81 have changed their business models almost overnight. Rather than depending on physical space, the companies are now streaming live classes on their platforms and making pre-recorded workouts available online as a direct response to COVID-19. Sometimes, there’s no need to change the business model, but entrepreneurs are now considering how they can help combat COVID-19. In digital manufacturing, for example, 3D-printing medical equipment and facilitating designs for temporary hospitals. Your VC is likely paying close attention to these cases, which can make brainstorming even more productive, so take advantage of these conversations.
Read more: London remains the European VC hub
Where are you in your fund lifecycle — and do you have cash reserves left?
Inevitably, cash is king. Each company has a different situation, but it’s key to avoid any unplanned fundraising in 2020 and founders should be asking their existing VCs about their own cash situations. You should get an understanding of whether there will be access to continued investment, if there’s any scope for bridge financing, and what the necessary circumstances would be.
VCs usually have reserve strategies where they set aside cash for follow-on investments in their portfolio. These reserves get consumed during a fund’s investment cycle, so if a fund is late in it’s cycle there may not be as much cash available for you. There may also be a specific strategy for your company, so don’t hesitate to ask about that either.
Remember that VCs have investors too. Ask your VCs if they are out fundraising. If so, they’ll want to look as strong as possible as they pitch, meaning incentives to provide bridges may temporarily change. Also ask if there are any considerations higher up the investment food chain, such as whether LP drawdowns are being slowed or are at risk.
How can we best communicate with customers?
Be informative, transparent and sensitive. At a basic level, this means wording all marketing materials very carefully. Words matter, so be mindful of the human crisis when referring to the pandemic in any way. Communicate clearly — be upfront and do not promise things you can’t deliver.
Depending on your business, show your wider values by offering empathy and consider tactical advice to your customers. Open lines of communication are key, which means doubling down on customer service — even if you have to personally respond to emails.
If you work in B2B, don’t shy away from asking your customers questions either. Have their sales dropped? Are they closing for the next few weeks? By being flexible and showing you’re there for your customers, you can help build trust and rapport during these uncertain times, which can pay dividends.
What’s your advice on how to reduce staff if necessary?
Unfortunately, some businesses will have to make staff cuts if revenues fall or if the prospect of securing future investment is limited. Whether this is furloughing people or letting someone go permanently, the advice is the same: do not make the all-too-common mistake of prolonging bad news.
If you have to make cuts to your team, act swiftly and cut sufficiently so that you don’t have to repeat it often. Founders often prolong the process — albeit with the best intentions — and regret it. Team morale can be damaged irreparably, as staff find themselves faced with uncertainty and a lack of leadership. Founders owe it to their hard-working teams to be as professional and upfront as possible early on, and may be surprised at how well teams handle the changes.
Alternatively, if you have the resources, consider putting team members to work in different parts of the organisation. Cross-functional exposure is a great chance for teams to learn more about each others’ corners, which can make the overall team much stronger and more united. Even if you can’t swap engineering and sales, marketing could support customer service.
If you are one of the companies that’s in a stronger position, think about your peers in the community and whether there are any positions available for people who have been let go. Founders also need to ensure they are sensitive to the difficult and stressful situations individuals now find themselves in, both team members who are let go and those who remain. It’s a good time to start measuring team sentiment and there are lots of tools available to do this.
Would you recommend we avoid trying to fundraise in 2020?
Raising funds can be difficult enough without a global crisis, so try to have as much cash runway in hand as possible — at least 10-12 months, ideally 18-24. Obviously for some companies, it may not be possible to avoid fundraising this year and if you do have to go out and fundraise in this climate, be prepared for a lot of hard work. Nearly all VCs are spending more time with their existing portfolio, so even if there is still cash out there, VCs have shifted focus. Many are still investing, but valuations are depressed and the bars are higher.
Some rules remain golden: plan your fundraising journey around milestones and then get in front of them. Build a story, identify turning points and inflection points in your business, and base your fundraising narrative on having just past them. Right now, asking investors to take leaps of faith about impending inflection points will be vastly more difficult than ‘normal’ times. Which, hopefully, we’ll get to see again in the near future.