Investor Perspective: How VCs See the Covid-19 Crisis for Startups
Over the past few weeks, we’ve heard from startup and scaleup finance leaders to get their response to the current crisis. But aside from CFOs themselves, there’s one other group that startup finance teams want to hear from: investors.
So we asked two experienced VCs for their outlook on this evolving economic landscape. Have funds closed their doors? Should growing companies invest more cash while others are dormant during this tricky time? And will the booming tech scene be the same as ever once our health systems are back to normal?
About our experts
Nicolas Debock, is a Managing Director at Idinvest in Paris. He’s been with the firm for two years, and a VC for 10 years across Idinvest and two other funds. Idinvest is one of the leading Paris-based, pan-European funds, investing in seed, series A and series B companies all over Europe.
Dominique Vidal, is a Venture Partner at Index Ventures, where he’s been for 12 years now. Prior to this, he was a partner at Banexi Ventures, before becoming a managing director at Kelkoo. Kelkoo was subsequently purchased by Yahoo!, at which point Dominique was made Managing Director of Yahoo! Europe.
Here are the five most interesting takeaways from their conversation.
Funds are open, but priorities have changed
Before the virus emerged, the startup scene was in a golden period - tech in particular. Companies all over the world were raising enormous amounts of money, and investor confidence was high.
So with the economy in trouble, have investment funds put away their checkbooks?
“A lot of VCs claim to be open for business,” says Nicolas. “Which is true, depending on where they are in their investment cycle. A VC fund is typically between €300-500 million. And they make 20-30 investments with that money. A lot of funds had raised money prior to this crisis, and they have to invest this. So it’s not really a liquidity shortage like you might see on the public market.”
But that doesn’t means that it’s simply business as usual for VCs. “Investors have a portfolio to manage,” continues Nicolas. “The first thing they do is look at their companies and figure out which are impacted most directly. Some won’t have any business to do anymore. Others might have been preparing to do a big fundraise, and now they’re unlikely to get external investment. So VCs may choose to invest more into these companies.”
“VCs typically spend maybe 30% of their time on existing portfolio companies, and the rest of the time looking for new opportunities. Now, it’s the opposite. Plus, you’ve now lost the opportunity to meet face-to-face. When you invest in a company, you want to feel that chemistry when you meet the team. That’s difficult to feel through Zoom.”
“My sense is very close to what Nicolas was saying,” adds Dominique. “I've started to see now two types of reaction. One is, we freeze, basically. You stay put and you don't make your investment. But if you like the team, if you like the project, you continue.”
CFOs should do whatever it takes to extend the runway
If it’s harder to attract VC interest at present, how can companies stay in solid shape for longer? “The number one thing is to reduce spending, says Nicolas. “How can you reduce spending? And which costs do you reduce first? This is not an easy question because you don’t want to fire everyone in the product or customer support departments just to keep cash on hand. The customers you still have will leave because there’s no product support anymore.”
“Another method is to increase debt. A lot of governments in different countries are putting rescue plans in place - either for the economy as a whole, or specifically for startups. Any debt you can take on right now will probably be for the better.”
And then there’s fundraising. As we’ve seen, this is probably not the ideal time. But if you don’t have a choice, what’s the right approach? For Dominique, there is still an opportunity for companies willing to alter their expectations. “If you want to close a deal quickly now, do so. Bring an offer - a great deal. Or say, ‘you know what? I don't need the money now. I can wait. I can wait a couple of months. Try to see how the outlook is going to revolve.’ But this is what I would do if you really want to secure money.”
“And then there are companies that have raised money recently. Some investors might have been interested at the time. And it could be a good deal to propose to extend the round where people interested in your company were not able to participate. So this could be a win-win, a win for the company, extension of the runway. And win for the investor because it's something they couldn't do in the past, but they could do now.”
Finance teams should build shorter forecasts, more often
Every one of our CFO Connect webinars these past few weeks has emphasized the need for re-forecasting. Old budgets and roadmaps have now gone out the window, and CFOs have to move quickly to reinvent their business plans.
VCs are doing this too, and are looking for this kind of analysis from their portfolio companies. “For the past two or three weeks,” says Nicolas, “CFOs and VCs have spent a lot of their time in emergency board meetings, trying to figure out what they’re doing and what is happening. Most companies will miss their 2020 budget target. They have to reforecast drastically because of risk of recession."
So what can you do? According to Dominique, keep your forecasts short, and be ready to update constantly. “Don't try to build too many scenarios at the end of the day, because it doesn't help. You're going to spend a lot of time and energy building scenarios, and in a couple of weeks time you’ll have to revisit.”
“Try to define the key metrics or what makes sense to help you understand how your business is impacted and how things are evolving. So usually three, four KPIs that you have to follow, and look at the evolution of these KPIs. Try to go to what is really essential and what matters in your business. And try to adjust based on that.”
“The difficulty obviously, is even these KPIs may evolve very quickly in the coming weeks because these KPIs are subject to other businesses that are going to be affected. So it's like a chain reaction.”
Forecasts now also need to take into account new factors, such as global health care. “First of all,” says Nicolas, “look at the shape of the curve. If you want to be rational to address it, you first have to look at the healthcare crisis. How long will the lockdown last? And how will people eventually come out of lockdown?”
“It also depends on your industry. One obvious example is electric scooters. Those guys simply can’t do any business while people are in lockdown. So for them it’s entirely dependant on the lockdown ending.” Consider whether it’s the right time to pivot With a relatively bleak outlook, executives will be thinking of every conceivable option to bring their companies back to strength. And in difficult times, it may be tempting to throw out the playbook - and even the product - to suit the new market.
So does this make sense? For Dominique, it depends on your definition of ‘pivot.’
“If a pivot is a complete restart because of the current environment, it's probably quite challenging because a pivot always comes with baggage. You forget about the old business, and start your new business with a large team. Now, if you can take a few people with you, and bring some very interesting thoughts from the experience, why not? But it's going to be very tough. This is the full pivot.”
“Now, if you want to be opportunistic and add new investment on top of what you’re doing, create new opportunities, and reallocate some resources that were used to do this in the past, that is more interesting. As an investor, it's always an interesting sign when a company can adjust to a fast-changing environment.”
“One thing you want to identify in an entrepreneur is their ability to adjust to a fast changing environment.”
Nicolas agrees, and offers a concrete example. “Look at what AirBnb is doing. They announced that they’re going to create a fund to support the homeowners that rent out AirBnbs. These are people who will have no rent revenue for a few months.”
“If you can help your suppliers during this crisis, you’ll be much stronger at the end. Especially if your competitors didn’t think of this or didn’t have the cash to do it.”
Prepare now to emerge even stronger
“You need to be in a strong financial position when you exit a crisis," says Dominique. ”But you also need to have a motivated team who wants to fight the new battles that will come. And for that, I believe if you can explain why the direction you're taking makes even more sense in the new world, or how what you're doing is even more relevant post-crisis, this matters a lot. Because people will always weather difficult conditions as long as they believe that what they are doing is relevant, and especially if it will be even more relevant tomorrow.”
“So I believe you need to show direction, a sense that this is meaningful for the future.”
Nicolas also sees value in this approach. “Culture is so important during a crisis. If you didn’t have that before, it’s going to be tough to create it now. I can see this in the portfolios I manage now - not all CEOs are good at creating a great culture. The ones that succeeded are coming through these tough times much better off than the others. Employees are more willing to understand the sacrifices that come, and will stay with the company no matter what.”
“A lot of startups are dealing with young people, adds Dominique. “And when you have never faced a big crisis, it's quite difficult to understand what it means. So probably some people with more experience need to share this experience with the younger ones. Because even when you have a great culture, we’re facing something very, very new and hard to comprehend.”
Investors are facing uncertain times, just like other businesses
Perhaps the biggest theme throughout this webinar was uncertainty. Just as finance teams are scrambling to predict the impact of Covid-19 on their companies, VCs are paying close attention to their portfolios.
For startups, it’s a great time to get to know existing investors even better. They’ll have a closer eye on you than ever, and they want to see you succeed.
So ask questions, share your models, and do what you can to stay front of mind. The more mutual trust and respect you can build during dark times, the more appealing you’ll be when lockdowns are lifted.
More crisis resources for CFOs
CFO Connect is a global community of finance leaders. We host regular meetups in Europe and the U.S., have a private Slack channel for CFOs, and produce helpful content on our blog. Join Us!