Leading Investors Discuss the Impact of COVID-19 on VC & Fundraising

Endeavor Webinar Series:

Insights by Chris Rogers & Pueo Keffer

Continuing its webinar series which aims to shed light on the impact of the Coronavirus crisis, Endeavor invited Chris Rogers, Partner at Lumia Capital and Pueo Keffer, Managing Director at Access Technology Investors, to discuss how should entrepreneurs adjust to this new world as it relates to fundraising and access to capital and to define the key factors that entrepreneurs should consider as they chart out their capital planning for 2020.

The investors discussed the current state of investments, while focusing on whether VCs are making new deals and on the kind of companies they are interested in. They also advised entrepreneurs to reduce cash burn rates and shared their views on the duration and the impacts of this crisis in the economy and entrepreneurship. Finally, they discussed best practices on raising money during these times and urged entrepreneurs to remain calm and make strategic decisions.  

The current state of investments

According to Chris Rogers, most VCs are not making many new deals right now, as they are only interested in companies that generate tangible revenues and that will most probably benefit from this crisis. Therefore, he advised companies that are not in urgent need of capital, to not reach out to VCs, as they will not be happy with the valuation they will receive. “If your company doesn’t use relevant technology, it is not the right time to go and pitch it to VCs in order to raise capital” he explained. 

Pueo Keffer added that in times like these, investors focus on their existing portfolio and only if their companies are secure, then they might be “open for business”. His prediction for the next moves of VCs was not very positive: “I expect that Venture Capital investors will be less active in the next 3-6 months.” he said.

According to Rogers, although changes in investments’ terms and deals are not that common, right now many investors tend to pull out. As far as traditional VCs with Limited Partners are concerned, “A fund that has yet to deploy, could find their LPs pulling back despite their commitment, thinking that they must hold on to cash.” he explained. “I have seen VCs pulling back just before papers were signed.” he added. 

He also advised entrepreneurs to “Take the emotion out. Leverage some emotional attachment to the founder and maybe some guilt to keep them in, but these are economic driven decisions and economics have changed.” He also suggested that entrepreneurs that are in need of capital and are close to making a deal to “Make the deal, and then use the capital to build your business. It is counterproductive to negotiate valuations during this period”.

Reducing cash burn rates

According to Keffer, “Entrepreneurs must first figure out their perspective on the duration of this downturn, as it will be a long cycle. In my view, it will take another 1-2 years until the market fully recovers.” After realizing the duration of the crisis, he suggested that entrepreneurs go through their expenses and start making cuts. Also, he suggested that they adjust their companies’ headcount, so that it matches their business. “You may often hear that first cuts are the most important and you may be advised to make cuts fast and deep and not to cut multiple times, but all these wisdoms are irrelevant now. You need to right size your headcount and drive your company towards profitability.” he explained.

“The time you will spend arguing on valuation, is time you could be spending to exploit this opportunity you are given to the market.”

Rogers added that for a business with no revenues, therefore no profitability, the likelihood of raising capital is very slim. “If the idea of your startup was great before the crisis, it will still be great in 24 months from now. Early stage entrepreneurs need to realize that there will be more, this is not the end of it all if the company fails.” he explained. At the same time, he insisted on the importance of the company’s leadership to share the pain. “Cutting down expenses and managing headcounts is very important, but cutting salaries of the high-level positions is equally important.” he said. 

Debt Capital Accessibility

Regarding the accessible capital, Keffer stated that “The best loans right now are the government ones. I am against venture debt, but it goes back to the question of necessity, maybe you need bridge financing that will get you to profitability. But before you get it, pay really close attention to the structure of the loan. It is not a long-term solution! Be very cautious of the personal liability some lenders might ask for if you are a younger company.”

Keffer also described the current situation in the US, where the Federal Government is being asked to support SMEs, by providing loans in order to keep their employees on payroll. “There are some programs providing loans with low interest and longer-term loans, but the situation is still really fluid and the big question lies on the implementation, on how you get access to these funds.” he mentioned. 

Raising money

Rogers and Keffer both agreed that well-positioned companies should grab the opportunity to raise money and they advised entrepreneurs to raise money without worrying too much about valuation. “The time you will spend arguing on that, is time you could be spending to exploit this opportunity you are given to the market. Get less money today and start working to make the revenues you expect.” argued Rogers. He also urged entrepreneurs to exploit the capital they raise, in order to make their company even more valuable. At the same time, he advised those who are not certain about their company’s strength not to rush. “You can’t over optimize, you can’t tick all your boxes. You don’t know what will “hit” your company tomorrow. Tick one box at a time and don’t over optimize.” he added. 

“You can’t over optimize, you can’t tick all your boxes. You don’t know what will “hit” your company tomorrow. Tick one box at a time and don’t over optimize.”

Keffer agreed that entrepreneurs whose products are facing high demand, should raise capital. “Although valuation is tricky right now, if you can raise capital with the prices of today, I would advise you to get it done fast. Don’t focus so much on the valuation, think about what you can do with the money you can take now, even if that means that you will not be able to fulfill all your planned projects.”

Finally, both investors agreed on the importance of making careful moves during these unprecedented times. Since the market is shifting very fast right now, they advised entrepreneurs to spend carefully and to focus on preparing themselves for what is coming. At the same time, they encouraged them by explaining that this situation is not their fault and that they cannot be blamed for taking drastic measures and making big, impactful decisions. “Entrepreneurs need to realize that this pandemic is not their fault” Keffer said. Even more, “There is no shame in closing down a company. It will be better than dragging it along until you have burnt all the cash.”.

You can listen to the recording of the webinar here