A Reckoning is Near

March 13, 2020

By: Dennis Ensing
While away on a recent vacation, I was unable to escape both the continuing story of the possible global impact of a COVID-19 pandemic and the increasing likelihood of an impending economic pullback.

Late in February, the NY Times published an article “As the Start-Up Boom Deflates, Tech Is Humbled.” On the beach, somewhere hot and isolated in the Caribbean, I read the article one morning, followed by a note that went out to Sequoia Capital’s founders and CEOs early in March – “Coronavirus: The Black Swan of 2020.” I then enjoyed a long walk in the sun and surf, but decided to write this post as I believe that a response is imperative within our members’ angel investment portfolio ventures.

The coming consequences of the convergence of these events requires you to consider some or all of these actions:

Cash runway

Ask your ventures for their 1 year monthly or biweekly cash flow forecast. Then ask: “Do you really have as much runway as you think? Could you withstand a few poor quarters if the economy sputters? Have you made contingency plans? Where could you trim expenses without fundamentally hurting the business? Ask these questions now to avoid potentially painful future consequences.

18-24 month view

Beyond the next 12 months, what impact could slowing revenue growth or increased expenses have on its forecasts? Now is not the time to look for hockey stick growth curves. Bore into forecast assumptions and repeat multiple sensitivity analyses to really understand vulnerabilities.

Capital constraints

If the answers to the first question are less than ideal or your ventures’ cash runway is short, they should be shoring up and building reserves in earnest, considering all possible funding options – dilutive, non-dilutive, and debt.

Valuations

Dilutive equity financing is becoming more expensive. It’s just supply and demand, plus risk as a big contributing factor. With constricted supply or capital and higher risks, beware of ventures continuing to position themselves on the high side of valuation ranges to preserve small measures of dilution when speed of closing and action might mean the difference between surviving – or not.

M&A – growth opportunity

Making fast and decisive adjustments to changing circumstances might also present opportunities to accelerate growth through consolidation. Strong ventures can make strategic and accretive acquisitions – adding customers, staff or new product lines to bolster plans.

Portfolio exits

This is also a very good time to consider where you should encourage ventures to pursue an exit and be consolidated. While the returns may be less than hoped or planned, the added ballast to your portfolio will offer important liquidity to add to your position in the strongest performing ventures.

I encourage you to follow the links and read both pieces in full. Not because I am fear-mongering. But because it is an opportune time to test the mettle of your ventures’ founders and also advise them to seek growth opportunities from a position of strength and preparedness. There is also a lot more detail in these articles that might be more relevant to come of your investees than others.

If you wish to discuss any of this further in preparation for a conversation with a specific venture investment, please don’t hesitate to reach out to me.