Venture Capital Beyond COVID-19
15 April 2020
Kjartan Rist for Forbes
It may seem like a long time ago, but back at January’s annual gathering of the World Economic Forum, there was little mention of coronavirus. At the time the outbreak was already prevalent across mainland China, and yet, as senior political and business leaders from our biggest economies debated prominent global threats such as climate change and weapons of mass destruction, the virus barely got a look in.
Few people saw the current crisis coming, and what we have on our hands today is akin to a tsunami, sweeping aside everything in its path and leaving a clear-up job that will require years of restoration efforts. Sadly, even the biggest tsunamis are hard to predict and tend to catch their victims unawares.
A future forever altered
In recent weeks successive governments have taken extreme measures to try and limit the spread of the virus–not to mention the extent of the damage. In taking these necessary steps, they have fundamentally changed the future course of our entire global business community.
Social distancing measures, travel restrictions and, in some cases, full or partial population lockdown, have meant that entire business models–such as physical branch banking/insurance–now look set to go the way of the dinosaur. Other models have had to undergo digital transformation overnight, for example, education services or non-urgent healthcare provision. The direction of these industries will be forever shifted as a result of the current containment and damage mitigation efforts.
Indeed, some businesses are even questioning the value of the physical office workplace itself given that millions of workers have had to adapt to working from home and embrace collaboration and teamworking technologies to keep up their productivity.
The use of the term “the new normal” is a little hasty–there are no guarantees that tomorrow’s reality will look the same as today’s. However, it is fair to say that, for the vast majority of businesses, there will be no going back to the pre-COVID operating environment.
An immediate change of focus for VCs
Early-stage businesses are, by their very nature, more vulnerable to negative external forces than their more established counterparts. Right now, there are three key questions likely to determine the prospects of thousands of VC-backed startups across the world:
- How badly has current and future cashflow been affected?
- What business metrics should I pay attention to?
- Are the products/services I’m providing likely to be deemed ‘essential’ by my customers, at a time when both individuals’ and organizations’ finances have taken a hit?
“In moments like these, smart companies survive by acting swiftly and justifiably to the changing environment,” explains Risto Rossar, founder and CEO of digital insurance software platform Insly. “For example, we’ve decided to decrease our costs by postponing our longer-term investments and accelerating our road to profitability, so that we can proceed with future growth goals from a stronger position.”
I wrote last month about the need for more venture capitalists to take on an ‘activist investor’ mindset. Now, as the COVID-19 crisis has escalated, even the most laissez-faire VCs have been forced into offering more support to their portfolio companies.
Of course, the difference is that activist investors are fully engrained into the key operational aspects and strategy of their portfolio companies and typically enjoy closer and more productive working relationships with their founders, meaning that when there’s a crisis they’re more likely to be addressed early on before any issues have escalated beyond repair.
Within our own business, we’ve had to rejig the way we operate to maximize the level of support we can provide to our community of tech startups. We’ve shifted our emphasis away from a growth mindset, towards helping these businesses identify cost-savings and extend their runways.
We’re also ensuring that we communicate as frequently as possible with our founders. The deeply interconnected nature of the VC world means that we tend to sense market changes more quickly than our founders, who are rightly focused on managing their day-to-day operations. We also benefit from observing best practices across the industry as well as within our portfolio. At times of crisis, it’s easy for companies to become too insular, which can make them slower to react to external events. Our role is to help each founder keep their finger on the pulse–both to mitigate new threats as well as capitalizing on any opportunities that present themselves.
Ultimately, the goal is to help our startups trade safely through this tough period. And while the majority of companies are facing the biggest challenge of their corporate life, there are still opportunities available for those that are smart and conduct themselves in a manner befitting of the times. As leading Silicon Valley VC Bill Gurley put it recently, “I am living through my third ‘reset’ in Silicon Valley. Reputations are built in hard times, not the easy times. If you shake a hand, sign your name–stand strong, or your word is no good. Otherwise, you are a transient that only wanted the easy take. And you should move on.”
However, while Bill Gurley is going through his third ‘reset,’ many within the tech startup community will be experiencing their first crisis as business leaders. It’s our responsibility as experienced VCs to ensure these entrepreneurs can tap into a broader network of expertise from those who have made it through previous downturns and the unexpected market shocks of years gone by, as well as from those successfully navigating the current crisis. Equally, it’s incumbent upon the founders themselves to voice their concerns or the issues they’re experiencing early, while there’s still time to identify solutions. Above all, they need to show that they have a survival mentality and are prepared to do what it takes to keep their businesses afloat.
Early learnings from the crisis
While it’s too soon to be talking about the ultimate ramifications of the pandemic, there are several learnings to be taken from what we’ve seen across the startup world in the past few weeks.
Firstly, real leaders are going to emerge from these chaotic conditions. It’s incredibly tough to keep a team motivated when salaries are being cut, layoffs made or furloughing introduced, or when team members are all working from home and attempting to complete their task lists whilst juggling family and household priorities or physical and mental health concerns. The founders that successfully organize, manage and inspire their teams throughout the current crisis will be tomorrow’s industry leaders.
Secondly, startups with strong, shared internal values and a clear sense of purpose are better equipped to weather the storm. Founders need to double down on organizational culture and position for the future–constantly reiterating why it matters so much that their company endures this period of adversity.
Thirdly, it’s clear that, beyond their existing investors, many startups are going to need State assistance to make it through the crisis. This won’t sit well with many from the entrepreneurial community, where the default mindset is normally to resist government intervention in all of its forms. However, while many VCs and private equity investors have provided emergency capital to their portfolio businesses, the way these funds are typically structured doesn’t allow much freedom to provide additional long-term financial support. If a startup is eligible for government-backed assistance, this offer should be taken up. Many startups, however, are ineligible (or no suitable scheme exists yet). In this case, founders must work with their investors to lobby governments and make their cases heard.
Finally, entrepreneurship is still flourishing, despite the ongoing turmoil. From village stores launching delivery services to manufacturing firms pivoting into ventilator production, there have been countless examples of entrepreneurial businesses responding to the crisis by adapting their existing operations to meet immediate consumer, business or community needs. In our industry, early-stage VC Antler has just launched a global COVID-19 initiative, inviting startups from the domains of mitigation, medical equipment, remote and digital tools to apply for funding.
Beyond this, the current travel and social distancing restrictions are creating longer-term opportunities for existing startups to pivot, diversify or wholly redefine their offerings. Right now we’re seeing a coronavirus-induced acceleration of automation across many traditional areas of industry. All manner of tasks, processes, interactions, and experiences are being adapted at speed for a digital-first environment. Recognizing that COVID-19 will permanently change the landscape of our lives, entrepreneurs are already planning for tomorrow to anticipate society’s future needs. These founders will still require a slice of luck to accompany their ingenuity, but this has always been the case.
Could VC firms play an even more important role beyond COVID-19?
While VCs are certainly not closed for business, at present the focus has shifted away from deal-making and towards supporting existing portfolio companies, as evidenced by the most recent data on European funding rounds, which showed the lowest level of activity in two years.
The world is being reshaped by COVID-19, and it’s imperative that VCs take the time to understand the new landscape and how each startup fits into it. Business models may need to be reconstituted; products and services may need to be reimagined in line with new customer needs and preferences.
Further, the cost of capital is going to be higher than pre-pandemic, both for investors and entrepreneurs. This will mean some tech startups have to think differently about when to take on external investment, while for investors, it means getting back to fundamentals. Expect to see VCs placing more emphasis on startup profitability over and above growth, a preference for proven business models, the requirement for management teams to demonstrate a deeper understanding of P&Ls, unit economics, and customer churn, and, of course, priority given to the leaders that have successfully navigated their way through the crisis.
As activist VCs, we must support these battle-hardened entrepreneurs in adapting to the new environment, using our experience to help identify the business models and product propositions most likely to succeed, and serving as a conduit for increased investment back into the tech sector at a time when financial support for startups will not be as easy to come by. Above all else, we must not lose sight of our purpose: to nurture and grow innovative and creative early-stage businesses to deliver to their true potential in the post-COVID world.