March has not been an easy month — to say that is an understatement.
I have had several close friends become ill though thankfully all, except one, have fully recovered. What is appalling is the rhetoric of political leaders that debate the trade-off between the well-being of its citizens and the broader economy.
When harsh realities slap you in the face, the best medicine is to smile and laugh, stay positive and focused, keep moving forward, and try to enjoy the rollercoaster ride.
Earlier this week, I published State of European Venture and B2B Software which shared perspectives of founders, operators and investors in Europe and the US. Since then, I have also spoken with LPs, bankers, advisors, healthcare professionals, and academics to gain a broader perspective.
The overall sentiment continues to be very mixed. Many are hopeful that the worst will be over by late May, while an overwhelming minority anticipate the status quo will persist until September and beyond. Investors like Temasek, Bessemer, and Social Capital are advising their portfolio companies to prepare for the worst by having 18 to 36 months of cash runway.
If the current sentiment continues, sub-scale B2B software businesses will need to rely on existing customers and investors for survival in 2020. Luckily, B2B software startups and scaleups are more resilient in comparison to companies that rely on consumer spending, manufacturing, or supply chains.
This article summarizes operational initiatives that many B2B software businesses have taken in recent weeks. It is a more comprehensive list than How to Prepare Your B2B Software Startup for a Bumpy Ride published a few weeks ago.
- Cut costs that are not measurable & attributable. This includes marketing, entertainment, and talent. Freeze hiring and let go of under-performers.
- Negotiate with existing vendors. List vendors, by €/£/$ spend amount. The key ones are rent and tools & systems (e.g. LeadGen, CRM, payroll, bookkeeping). Speak to their competitors and request for better terms. Offer to sign a longer contract in exchange for lower cash payments in 2020 and 2021. Build in more flexibility, if possible.
- Maximize cash received from customers, sooner. Send customer invoices on time. Make sure customers pay on time. Turn loyal customers from monthly or quarterly to annual or multi-year payments (and offer discounts). Move up renewals and high prospects — a number of startups I spoke with mentioned they were able to tap into the “COVID-19 Emergency Budget”. Incentivize Sales to close annual or multi-year contracts with more upfront cash payment. Prioritize customer logos and case studies, as brand matters more now.
- Reduce compensation. Keep talent by reducing work time & salaries by X%, more than X% for co-founders. Make up for the difference by rewarding with equity.
- Create 3 different forecasts for 2020 (operating, downside, worst case). Assume 1–3 quarters of no new business and 18–36 months of cash runway.
- Extend the cash runway. Engage and maximize capital from existing funding partners (e.g. government, banks, existing investors), as soon as possible.
- Prepare to fundraise after summer. Wait until the markets are calmer before engaging with new investors. It appears more than two-thirds of European VCs are still active (based on the self-declaration of 320 funds of 447 in total).
However, many I spoke with indicated they are:
Prioritizing portfolio support which is still ongoing,
Reducing activity for new investments in 2020 by one-third or half, and
Will only invest in startups that they have been tracking for at least a few months and ideally, have met in person.
If a startup has already kicked off its fundraise, venture veterans (who have experienced at least 2 economic cycles) recommend only continuing dialogue with prospective investors who are:
Active demonstrated by their funding activity in February or March. (Speak with the founders of those recently funded businesses!)
Prepared for a recession in Q4’19 or Q1’20 and have already received money from their LPs (a.k.a. “drawn down capital” or “called capital”), and
Committed to the startup’s founding team and its long-term vision by offering reasonable terms, including at least 18 months of funding.
TechCrunch recently published an article called How to Value a Startup in a Downturn which I found quite insightful.
It is during challenges and conflict that people show their true character. And it is behaviour during times like now that reputations are built.
“Reputation runs behind the current state of affairs.” — Mason Cooley
“Reputation is built on manner as much as on achievement.” — Joseph Conrad
Take money from investors as soon as feasible, yet also make sure they are the right long term partner.