According to a recent survey of 780 entrepreneurs and business executives, 87% expect COVID-19 to have at least some negative impact on their company's operations and financial position. Companies are seeing revenues drop sharply as customers curtail spending, delay purchase decisions, and conserve cash to weather this crisis.
Time is of the essence. Investors must act quickly and urgently to stem losses and shore-up operations and finances.
How, then, can Venture Capital and Private Equity investors manage their portfolios amidst this crisis? Here are a few suggestions.
These are stressful times for startups and mature companies. Sales are tanking. Cash is running out. Economists are warning of a deeper recession ahead, and there's no clear visibility on when things might get better.
In such times, investors must immediately boost communications with each of their portfolio companies to get a clear, metrics-based view of employee wellbeing, product/service demand, sales, expenses, cash flow, contingency plans, need for additional funding, etc.
Investors should host virtual fireside chats so portfolio company CEOs can share ideas and solicit input on how to get through this crisis. Private Equity and Venture Capital firms must also leverage their network of customers, industry experts, and partners to help portfolio companies wherever possible.
In April 2020, Sourcescrub surveyed Private Equity, Venture Capital, and Search Funds to get first-hand insights on how the Coronavirus pandemic has impacted their operations, investment strategy, and outlook. Surveyed firms reported spending 39% of their "time and energy" on Portfolio Management, significantly more than on other activities, to understand and manage the risks that their portfolio companies face. They reported that turning inward and making sure their house was in-order was very effective in portfolio stabilization and risk mitigation.
Specifically, investors should quickly assess and manage risk across four major areas:
After carefully, but quickly, assessing each portfolio company's risks in quantifiable terms, Private Equity and Venture Capital investors must urgently help management make strategic, operational, and financial decisions for each company.
Calling coronavirus "the black swan of 2020," Sequoia Capital told its portfolio companies, "We suggest you question every assumption about your business. Having weathered every business downturn for nearly fifty years, we've learned an important lesson - nobody ever regrets making fast and decisive adjustments to changing circumstances. As Darwin surmised, those who survive are not the strongest or the most intelligent, but the most adaptable to change."
What seemed like a really viable product or service six months ago may no longer look as good in a post-COVID economy.
Some of your companies could well be thriving with consumers and businesses under lockdown; others, with fundamentally relevant products and services, may be experiencing temporary delays; a few may need to pivot their plans to adapt to a changed world; and a handful may no longer have long-term viability.
After understanding the risks from changing circumstances, investors should quickly make prudent decisions on which companies to support, which ones to pivot, and which ones to shut-down, or leave to fate and CEO chops.
As Sequoia noted, "Even if you don't see any direct or immediate exposure for your company, anticipate that your customers may revise their spending habits. Deals that seemed certain may not close. The key is to not be caught flat-footed."
According to our recent survey, portfolio protection and management is the #1 priority for private investors. Accordingly, investors should err on the side of safety, and prioritize more capital for follow-on funding of existing portfolio companies, relative to capital for new investments.
With uncertain times ahead, consider the worst-case scenario, and try to give your portfolio companies at least 12 months of working capital.
With revenue quickly drying up, and cash burning fast, companies understandably need to slash expenses. In such dire times, it's important that investors and CEOs be compassionate, and consider the human angle.
Investors should open up their wallets to fund salaries, and explore alternatives such as reduced working hours or temporary layoffs with subsistence pay, so employees can get through this crisis in a humane manner.
Look for other places to cut costs. For instance, with sales softening, this may be a good time to slash your marketing budget or capital spending plans, or freeze new hiring while boosting employee-intensive R&D to foster innovation for the post-COVID world.
Consider this an investment in corporate social responsibility, which will undoubtedly benefit your fund and your portfolio companies over the long run through favorable public perception, and higher employee loyalty, engagement, and productivity.