Source: Medium – By Andrew Chung, Founder & Managing Partner @1955Capital
Andrew Chung is the Founder & Managing Partner @ 1955 Capital and has been a tech investor and entrepreneur for over 20 years. He founded 1955 Capital to invest in transformative companies that can solve the most pressing issues in the developing world. He is always in search of world-changing ideas in sustainability (energy, food, agriculture), health, education & other emerging technologies. Prior to launching 1955, Chung was a general partner at Khosla Ventures and served as board director or helped advise more than 20 portfolio companies.
On behalf of the 1955 Capital team, I’m hopeful that you, your team, and your family are staying safe amid the minute-by-minute evolution of the COVID-19 crisis. Over the past week, we have been in close dialogue with our portfolio companies about the coronavirus situation. More specifically, how its unprecedented nature heightens the importance of solid leadership, good decision-making, and thorough scenario-planning through this crisis.
Having lived in Greater China and advised companies during the 2002–04 SARS outbreak, I know firsthand how a pandemic can dramatically slow businesses down and force a rethinking of their strategies. But I have also seen companies prepare themselves well and come out of a crisis stronger than before. By managing through the situation with prudence and calm, our hope is that companies will invent ways to emerge on the other side of this in an advantaged position relative to their competitors and be ahead of the curve when the market turns.
In taking stock of some of the challenges and opportunities in front of 1955’s portfolio companies, my team and I humbly suggest that our CEOs consider a few major points as they press on during these trying times. If you know other CEO’s fighting to manage during this pandemic who could benefit from this advice, please feel free to share the below.
#1 — Ensure safety of team
From our perspective, this is the most important priority. Social distancing is a critical step in reducing the spread of disease, and working from home (WFH) is a now a mandatory step for many teams nationwide. However, for many global enterprises and startups with a large workforce providing “necessity” services, they may face a challenge to be all-virtual. Startups with physical products that have interactive R&D processes, field testing requirements, manufacturing capacity, and distribution assets may not survive a long-term shift to “shelter in place.” Some questions to consider:
- What is required by the local and federal government agencies around employee and community health safety? How long can your company weather full or partial WFH requirements?
- What functions absolutely require team members to be on site or in the field? Are there creative solutions — from using robotics to establishing new partnerships — to minimize this?
- Have you implemented all protective measures possible to ensure safe work practice, including sharing resources to promote personal hygiene, providing sufficient supplies, and taking steps to minimize exposure to coronavirus. The CDC provides guidance on keeping the workplace safe.
- Have you considered rotating on-site or field personnel, physical separation or spacing to ensure social distancing, or establishing new time shifts to support continuing activities that can’t be done virtually?
#2 — Minimize treasury risk
Given the unprecedented nature of the shift in market sentiment, a prudent step would be to ensure a minimal risk profile on your access to capital. Confirm with your banks that they have a robust balance sheet and there are no unexpected risks around access to that capital. If you have taken any debt, be extra mindful of the covenants or other conditions — either drawn or yet to be drawn. Partner closely with your banks and investors to ensure mutual transparency so that you have their support if things get dramatically worse.
#3 — Assess longer-term impact, proactively address failure modes
The coronavirus situation has unraveled financial markets faster than any other crisis in history, with the shortest peak-to-trough decline ever. Some investors believe that that could mean a faster recovery if the coronavirus spread slows (like it seems to have done in China), given this slowdown was engineered and could potentially be unwound. Others believe that it will be a much slower recovery given the impact on small businesses and unemployment may be more permanent, there is potential for multiple waves of viral infection, and the reopening of the borders may take place in an unpredictable fashion. You need to be prepared for all cases.
Many CEO’s are naturally being reactive to the acute situations they face with the day-to-day change in the coronavirus situation. We feel strongly that it is critical to stay ahead of the developments and be proactive in developing strategic alternatives. Nationally, there is increasing talk of domestic travel bans, lockdowns, and curfews. The European Union just closed its borders for the next 30 days. Ask yourself, How will the virus affect your business if these extraordinary conditions persist? For one month? Three months? One year? Or “18 months or longer” as warned by last Friday’s U.S. virus plan? Some strategic questions to reconsider — as a team and with your boards and investors:
- What can cause your company to fail if these conditions persist? How will the coronavirus impact delay achievement of future fundraising milestones?
- Will employee retention/morale become an issue as these conditions persist?
- Can you deliver your product or service as originally intended? Will you need to postpone marketing launches or other PR activities?
- Will you have access to key resources and materials to move R&D or production processes forward? How will this affect your supply chain and inventory planning?
- How will this affect your ability to do business development and build partnerships? Are they open for business? Can you continue to conduct field testing, trials, or pilots?
- Will border closures affect your business?
As the leader of a startup company with limited resources, it’s vital to understand what potential worst-case scenarios could look like, understand what might affect your ability to deliver on key milestones, and prioritize addressing the 2 or 3 key issues that could cause your company to fail.
#4 — Do extensive contingency planning around your budget
Once the key strategic questions are reassessed, issues prioritized, we would strongly suggest having extensive “if/then” contingency planning around your 2020 budget and beyond to extend your cash runway. Under normal circumstances, we suggest our companies consider budgetary discipline around unlocking capital spend based on the achievement of certain key milestones, i.e., “if X happens, we add Y to our spend to accelerate development.”
With the uncertainty around the pandemic, we would encourage our companies to add duration of the coronavirus impact as a key variable in this analysis: reduce non-essential spend where possible, then layer on additional spend based on (a) some combination of achievement of key development milestones and (b) a subsiding of the effect of the virus situation after 3, 6, 12 months, and potentially beyond. In a new world where forced lockdowns and work stoppages could seriously impact both the timing to achieve key fundraising milestones and the availability of new funding sources themselves, it’s more critical than ever to make the tough decisions early and give yourself time and runway.
#5 — Prepare for fundraising to be difficult in near-term
Many venture firms are in crisis response mode and helping their range of portfolio companies manage through this crisis. 1955 Capital has an emerging portfolio of 10 companies and has focused recent efforts on providing strategic assistance during an uncertain time; we do continue to look at new opportunities but will be more cautious. Some venture firms have hundreds of portfolio companies and will be heavily distracted with portfolio triage and support. As a result, it may be much harder to break through the noise and get attention for new investments for some time with some firms. The inability for investors to travel and meet in person will also make completing due diligence much more difficult for all of us.
Finding ways to extend runway and provide ample time to achieve key milestones attractive to future investors is doubly important in this environment. If fundraising needs to happen sooner, then it will be important, in our view, to considering the following possibilities, recognizing that most avenues are difficult at this time:
- Prioritize investors who already have significant background on the company. Those who have done some due diligence previously or have closer relationship with you or your team will have a much-needed head start in this environment. To the extent that such an investor is still open to making new investments, they may prioritize you more in this environment, since they may not need to spend the face-to-face time typically needed to make a decision.
- Be more flexible on terms or syndicate/round construction to a point. But don’t panic — the more optionality you can create with additional runway or other austerity measures, the more ability you have protect your desired terms.
- Consider recasting your fundraising target to do more with less raised. If you are halfway to your targeted raise in the pre-coronavirus world, try to close on what you can, while revising your budget to do more with the smaller raise. Get the deal closed now.
- Find creative ways to compel strategic partners or government sources to help fund the company or contribute to development. While venture firms may take some time in the coming weeks to assess their portfolios, some corporate and government initiatives have fixed annual budgets for providing investment and grants and may still be readily accessible even in today’s uncertain environment.
#6 — Turn this into an advantage if possible
There have been many companies that have fought through a crisis better than their competitors to emerge as the winner on the other side. Some of the most successful current unicorns emerged from the ashes of the last global financial crisis. Necessity is the mother of invention, and many of these successful companies developed creative product ideas, novel distribution methods, more capital efficient production models — when they needed to the most. Every company — large and small — is going to suffer some negative impact from the coronavirus situation. They key question is whether you can be nimble enough to survive better than your slower-moving competitors or industry incumbents — and thrive in an uncertain environment.
As such, we have encouraged our CEO’s to look more deeply at their businesses and brainstorm how they can somehow weather this situation better than other players in their space. Some questions we have suggested they consider:
- How does this pandemic illustrate a greater need for your product in the market? Is there something about this situation that makes customers need you more, now or over the longer term?
- Can you adapt your product offering to satisfy that need better in the current environment faster than your competitors? Can you introduce product lines faster that are sensitive to the current supply chain/inventory limitations?
- Are there certain direct-to-consumer models that you can implement faster than incumbents who have a retail distribution / inventory model that will be directly impacted by the coronavirus and the closed borders?
- How does this situation present a greater existential challenge a slow-moving, larger industry player disproportionately vs. a nimbler startup company? Is there something about this situation that makes strategic partners need you more, now or over the longer term? Can you shorten the time to commercialization by addressing this need?
- How does the current remote, video-conferencing situation level the playing field for you vs. other competitors who have a global sales force? Can you make to make workflow for you and your partners more efficient without travel and meeting logistics?
- Do you have any funding advantage that can allow you to move more quickly than underfunded competitors?
- How can your team interact and collaborate more efficiently virtually? Can you implement remote management techniques (e.g., via robotics) that could give you an advantage over your competitors?
- Can you invent more cash-efficient compensation models (taking more equity vs. pay, new incentive systems, etc.)? Are there ways to be more creative about the use of vacation time and sick days?
#7 — Project prudence and calm
In crisis situations like these, panic can set in faster than you might expect — especially for those of us following the markets and the news. That’s why it’s more important than ever that employees feel that the CEO and board are managing things decisively and with confidence, even through some tough decisions. Some thoughts to this end:
- If you haven’t already, we would suggest you send a COVID-19 response note to your employees to show leadership and express calm on how the company will manage through the situation.
- Assuming true, we would suggest you make it clear that there are no known cases within the company.
- You may have to create policies that are atypical and respectful of the situation for all. For example, WFH policies should consider the primary HR issue that many folks with children home from school may need to grapple with uncertainty related to childcare.
- Consider providing mental health resources or other counseling support to employees.
- Manage employee morale properly by finding ways to show that you are behind them, even as tough decisions are being considered. Find creative ways to keep critical personnel motivated and feeling secure.
I know this is a lot to digest, but hopefully this is helpful to you and your management team as you consider the path forward. Lean on me, the 1955 team, and your board members as you need to during this uncertain time. Happy to discuss any of this by phone (or Zoom / Facetime / Google Hangouts). I remain hopeful that we can manage through this situation carefully as a team and emerge on the other side stronger for it.
Read the article at medium.com