As a follow-up to our message on Angel Investing in Challenging Times, Christopher and I tasked Raza with putting together an update and perspective piece for the CEOs of our portfolio companies. The letter outlines our thoughts on some of the challenges they will face in the near term. In addition, Raza talks about steps each CEO should take right away to bolster their company. And finally, he touches on some of the resources they should reach out to within our local and national communities.
We are sharing this letter with the angel community at large so all can benefit from the knowledge we gained from over 20 years of active angel investing experience through economic highs and lows.
Dear Launchpad Portfolio Company CEOs,
We are in a different time from just a few weeks ago - a time of upheaval and downward drag that now looks to extend for multiple months rather than a few weeks. We thought a letter of encouragement and advice might be helpful right about now. As an entrepreneur having gone through both the 2001 and the 2008/2009 downturn I can tell you that it does come back if you are able to pull through challenging times.
Today, the health and safety of yourself, your family, employees and customers is most important. Please continue to do what you can to stay safe and let us know if we can help.
Building a company in peacetime is very different from building a company in wartime. You now are forced to be a wartime CEO. For perspective, keep in mind that some of the strongest companies have been built through tough times.
What you should expect to happen
Let me first start by saying that every company may experience slightly different challenges depending on funding history, cash balance and the market need for your product.
There may be some lucky few where the demand of your product skyrockets (such as Zoom). If you are one of the lucky ones, skip the remainder of this letter and go focus on the entirely different set of problems your newfound scale may present.
For the rest of us, some form of recession seems increasingly inevitable, and the crisis mode will likely be around for a while. Some experts believe it could be with us for 18+ months. As a result you are likely to be facing some or all of these short term challenges:
Your sales coming to a halt or taking much longer as customers understandably focus elsewhere. Whatever your projections were for the next quarter or year are not likely to materialize according to plan. If they can, some customers may even cancel existing contracts.
Some of your customers/markets/segments may completely vanish altogether
Some of your suppliers, manufacturers, partners may become unreliable or even go out of business as they get impacted by this
Raising new dollars may become very difficult and prolonged, if not impossible
Morale may plummet and company culture may suffer as your employees face more uncertainty about the future, and hardships outside of work
Exit opportunities will be deferred for a long time or disappear altogether
Any weaknesses in your business model that might once have been ignorable, are now going to be glaringly obvious.
Steps you have to think about now
“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.” Sequoia: Coronavirus: The Black Swan of 2020
We, both as entrepreneurs and investors, wouldn’t be in the startup business if we weren’t inherently optimistic, so we’ve got to roll up our sleeves and get down to work. Your priorities should fall roughly into these five buckets:
Anticipate the Problems. Analyze your company’s situation. Stress test your company, particularly your revenue assumptions and cash forecasts. If you are not good at cash forecasting, now is the time to learn. Where are you vulnerable to the effects of this crisis? What would be your new net cash burn after acknowledging possible lower sales?
Focus on Liquidity. Get more money in the bank, if there is any way you can. Draw down any credit that you may have available sooner rather than later as interest rates are low. While fundraising in a down market, adjust your expectations - it is going to take longer and risk-adjusted valuations will change. Optimize for speed and enough cash to survive instead of maximizing valuation.
Aggressively Chase and Protect Revenue. Work on preserving and accelerating all reachable revenue. Offer customers discounts for pre-payments, extending contracts to more years, structure new contracts for upfront cash, explore near-term revenue opportunities.
Quickly Reduce Cash Burn. Review expenses. Reevaluate hiring plans. This is where you may be making the toughest choices of having to let go team members that you put such effort into hiring and training. Try to re-negotiate large fixed expenses such as rent. Consider asking for several months of forbearance or a discount with your landlord. If they say no, consider asking for it in exchange for a longer term or slightly higher rent in the future. Defer nice-to-have investments vs. must-have. The most immediate cause of death of a company is running out of cash. Run your company as cheaply as humanly possible.
Keep Your Perspective. Make these tough decisions while striving to maintain mental health and sanity both for you and for your team. Have the support you need (and try to be the support others need) for making tough decisions while having lack of control, coping with feelings of guilt, breaking bad news to employees, investors, customers while minimizing the impact of morale. These are times that challenge company cultures, and company cultures are built from the top down. Be the inspiring leader you are capable of being.
Resources and people that you have
As you strive to adapt to the challenges of our new reality, don’t forget your board, advisors and mentors are an important resource you can draw upon. Every company board should be meeting urgently if they haven’t already. Update them on what your company’s specific situation is and seek guidance and help laying out a priority plan of action (including seeking approvals for fundraising if appropriate).
Your investors are also an important group you can turn to. Not only can they offer practical advice and perspective, they can help support the company financially. Even if you have raised money recently, consider whether you should offer to raise another round at the same terms to salt away a quick extra cash cushion (likely well worth the extra dilution). Your investors have seen a lot and will have a good perspective as you consider these options based on your cash situation and what you’ll need to keep the company going through the downturn.
Beyond cost cutting and revenue acceleration, it may be possible to gain additional relief from the state and federal government. At the federal level, IRS Notice 2020-17 has extended federal tax filing and payment guidelines by 90 days, giving companies extra time to prepare their tax returns (and pay taxes if applicable.) And the Small Business Administration has also launched an Economic Injury Disaster Loans program that is offering low interest loans for small companies who apply.
At the state level, Massachusetts Department of Revenue has said they intend to follow the IRS with their own similar tax payment and filing extensions. Unfortunately actual grants from the Commonwealth are no longer available. Governor Charlie Baker announced the state had established a $10 million relief fund to give $75,000 grants to Massachusetts businesses affected by the coronavirus, but due to the availability of the Federal Small Business Administration funds, the state stopped accepting applications to the program as of 12:30PM on March 19th, 2020.
Congress is working on new relief measures at this time, including U.S. Senate Bill 3548, the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act,” sponsored by Senator Mitch McConnell and other Senators on March 19, 2020, which includes proposals to expand the Small Business Administration 7(a) Loan Program to address working capital needs of certain businesses, so keep your eyes open for relevant developments. So companies are encouraged to keep an eye on the news and keep searching for potentially helpful programs. If we turn up any new leads, we will post them on the Launchpad Portfolio CEO’s LinkedIn Group.
Please note that the information about relief and help from the government is evolving and changing rapidly - NVCA has a page that captures more up to date information. The message here is that the state and federal government may be sources for help that you should look out for.
Launchpad has a history of funding in both good times and tough times. The group was founded around the 2001 crash and also funded companies through the 2008/2009 financial crises. We recognize that some of our best performing companies were funded in those difficult times. Launchpad’s strong band of angels is still investing and open for business. Despite everything switching to video, we’ve already had very strong participation and interest in continuing to look at companies. We anticipate that you may need more funding than initially anticipated, and will do what we can to assist you. Before this crisis hit, Alex Brown and I had just joined the Launchpad management team allowing us to provide even more support to companies Launchpad members have funded. Please reach out to us for any support and help that you need. We firmly believe in adding through our human capital, advice and moral support as well as financial capital.
Raza Shaikh and the Launchpad Team
For more articles on early stage investing during economic downturns, please read Angel Investing in Challenging Times, Don’t Give Up On Your StartUp Dream! and Advice and Caution on Angels' Role In This Crisis.