COVID‑19: Venture Capital Perspectives and Reactions
This article is part one of a series on VC perspectives and how VCs are responding and supporting their portfolios in response to the realities of COVID-19. If you would like to provide commentary, please contact us here.
Breezing past trade disputes and political volatility, yield-curves and domestic energy conflicts, venture capital in Canada is coming off of performance records that haven’t been seen since the dot com boom of the early 2000s and the 2008 Financial Crisis.
Watching for a market correction at the beginning of 2020, few could have predicted a global pandemic would rapidly adjust our (temporary, hopefully) way of life and the way we conduct business.
What kinds of assistance are you providing to your portfolio companies?
While we are always in touch with our founders on a regular basis, there is no question that our levels of communication have increased significantly as a result of COVID-19. Our focus centers around helping our companies weather this short-term crisis and simultaneously set them up for long term success.
Top of mind for many of our companies was simply getting through the crisis. In order to do this, our first objective was to help them understand the impact of the situation on their companies, both in terms of company metrics (such as customer acquisition and sales) and the fundraising landscape. Once this was understood, we helped our founders best position themselves in this environment and also ensure that they would have enough cash runway to last them at least 18 months.
With respect to ensuring the companies have at least 18 months runway, our partners have been engaged in needs-based, one-on-one support around scenario planning, trigger analysis and reducing burn rates where needed. This not only looked at the cost side of the company but also the revenue side and fundraising opportunities.
We helped a number of companies think through alternative uses or broader applications of their products and services. This has been particularly relevant for companies in harder-hit industries but is also applicable for those startups that are seeing elevated demand as a result of the new urgency for digital transformation. We encourage our companies to think through their value proposition, target customer and pricing, and identify if – and how – one or more of these things should be adjusted to reflect our new short and medium term environment.
In terms of fundraising, in the past several weeks, we have helped our companies close new rounds led by existing and/or new investors. We have also worked with them to think through other capital options including debt financing and the BDC Matching Program.
Beyond helping the companies, we also actively support our founders/CEOs as human beings and leaders who are dealing with a crisis that is not only impacting their businesses and teams but also, in many cases, themselves personally. To do this, we are offering ourselves as trusted partners who care deeply about them as individuals. We are also offering webinars and a coach-led Founder Circle for CEOs who want to connect with other CEOs who are experiencing similar things, in a safe and supportive environment. In addition, we have encouraged our companies to connect more via our Slack community and we’re seeing a lot of CEOs and other executives supporting each other as they navigate these uncharted waters.
We also recognize that there’s a lot of communication happening — so much content being blasted at everyone about how to cope and what to do — that we wanted to help cut through the noise. We decided to increase the frequency of our founder-focused newsletter to weekly so that we could curate the best of what we see and save our founders the time of having to sift through the plethora of well-meaning but often low-value information being shared.
The whole Real Ventures team really jumped in to help, creating founder resource lists detailing government updates and funding sources, templates and guides, plus other content that we shared publicly to help the companies through the transition to remote work. It’s not just about helping companies reduce their spend — it’s vital that we help founders to support their teams by taking a proactive and mindful approach to communication and decision making.
We’re always in regular contact with our CEOs. That didn’t have to change very much. We sent an email in early March that basically said, “A, how’s everybody doing? B, you need to start thinking about immediate cash preservation because this crisis is going to get worse.”
We really started with the health and wellbeing of all of our employees. Across the Relay portfolio, we’re employing almost 6,000 people. So this is critical.
Further, we began developing contingency plans and scenarios with each of our companies and we basically said 18 to 24 months of cash is what you need.
With respect to the government programs, we took a fairly aggressive initial posture that said, “If it’s an appropriate program and you qualify for it, you should take it.” We started to back off a little bit as we learned more about these programs, particularly in the US. One of the ways we are helping the portfolio was to understand the whole landscape.
We’ve been running a series of webinars for the portfolio with prioritized topics. The very first session we did was about the myriad government programs. Our portfolio is in Canada and the US, so we had experts who could advise on both the US and Canadian programs. Everyone was also talking about their leases and questioning how to get relief from rent. We had two real estate experts on, and we discussed how do you manage obligations to your landlord. We’ve also have had a conference call with Canadian and American tech lenders and bankers. We are continuing to focus on practical and tactical advise for our companies to implement in real time.
We opened a Slack channel very early, putting all the CEOs in contact with each other. This is a critical and beneficial thing because younger CEOs have never been through this type of disruption and our more experienced CEOs can provide a tremendous amount of help.
We took all the information that we had been collecting about resources in terms of navigating the crisis and gave this to all of our CEOs as a guidebook, and we made it broadly available, so other founders could take advantage of it as well.
How long should new startups expect it to take to raise capital now vs. pre-crisis?
As always, the amount of time it takes to raise depends on several factors, including not just the macro funding environment but also the industry of the startup, its positioning, its traction, its growth rate, its team, its target investors, and several other factors. Some of the most successful startups raised significant early funding rounds during 2009 including Dropbox (Series A), AirBnb(Seed), Uber(Seed) and Square(Series A). And we have seen a handful of our companies raise solid rounds over the last several weeks.
That being said, generally-speaking, it will take longer for most startups to raise capital now than under more favourable market conditions. Since the crisis hit North America in early March, most investors, ourselves included, have been focused on working with their current portfolio companies to assess the situation and help them be positioned for long term success, including re-investing in select companies. As a result, many VCs have not had time to consider new investment opportunities.
That said, many companies that provide telemedical care, virtual learning and replace human processes with electronic processes are benefitting significantly at the moment and would be likely to see an increase in interest from financers if their vision, product and track-records are strong. We have companies we work with that were planning to start fundraising this spring and after taking a moment to reassess the landscape are having great conversations with investors. Paraphrasing Matt Gillis, CEO of Clean.io, which is looking to raise their Series A, the venture community isn’t getting paid to hold money and sit on the sidelines. VCs are open for business, looking for great ideas, great entrepreneurs and billion-dollar businesses. That hasn’t changed.
You know that magical pendulum that swings in favor of the investors or the entrepreneurs? For a long time, that pendulum was way, way over – so far over for the entrepreneurs that it just didn’t matter what the investors wanted to do. That pendulum has rapidly swung back the other way.
When I talk to a lot of my fellow investors, everyone is just taking their time right now. It’s not because they’re not interested in doing deals, but because the priority is on the current portfolio. You must manage that portfolio really, really carefully because we don’t want fatalities as a result of this crisis. I think when you have confidence that your core portfolio is in a good place, then you can start to consider new investments.
That pendulum also implies a protracted time period to get a new investment closed. I don’t yet know how we would meet an entrepreneur for the first time over Zoom and get through a complete funding process. If we did, it’s going to take a lot longer. This is a business that is really about the connection between the investor and the founder and the founding team. It’s not about the market you’re in. It’s not about the technology you’re building. It’s about the relationship that we build with you because we’re going to be partners for a long time. I don’t know how that gets done entirely virtually.
We do have some companies that are raising money right now. Through no fault of their own the plan was to raise a Series A in the spring. Our syndicates are now basically saying, you know what? Let’s try to avoid funding in 2020 if we can. So, we’ll do an extension instead. We’ll push off the series A into 2021 if we can.
This article is part one of a series discussing how VCs are responding and supporting their portfolios in response to the realities of COVID-19. If you would like to provide commentary, please contact us here. In the next article, we will take a historical look at managing during disruptions.