COVID-19: Our Guidance to Portfolio Companies During These Difficult Times
As I write this, there are more than 700,000 confirmed COVID-19 cases and more than 33,000 deaths in 203 countries, according to the World Health Organization. In the U.S., we now have the most known cases of any country. The virus has caused an unprecedented health crisis and an economic catastrophe as many state and local governments have shut down causing 3.28 million people to file for unemployment.
Over the past couple of weeks, we’ve been moving quickly to understand the financial implications resulting from COVID-19 and the impact on our portfolio companies. We recognize that some start-up founders and employees haven’t been through a down economy. Sapphire Ventures has been through multiple economic cycles, including the global financial crisis of 2008, and we are here to help our entrepreneurs and CEOs make the smart and necessary decisions during these turbulent times. That’s why we’ve been laser focused on engaging with the start-ups in our portfolio in order to ensure that they have what they need to weather this storm.
The shelter-in-place initiatives and shutting down of all non-essential businesses in many parts of the U.S. have caused immediate financial challenges to most of our portfolio companies with some being impacted more than others. Fortunately, we primarily invest in B2B companies, which haven’t been as dramatically impacted as businesses like restaurants, retailers, airline companies and hotels. In fact, we still very much see the value enterprise software companies are creating--specifically those specializing in remote work, collaboration, artificial intelligence and machine-learning, cloud security and workflow automation.
We continue to be open for business at Sapphire Ventures as we look to invest in companies of consequence. But things are not going to be business as usual for our portfolio companies until we come out of the economic downturn, so here’s what we’re sharing with our start-ups:
Remember that cash is king
Because of the uncertainty around when the virus will pass and when the economy will bounce back, be prepared to have enough cash runway for the next 18-24 months. This means finding ways to conserve cash. Run multiple scenarios to see what your cash needs are going to be in each scenario and be prepared to act quickly since there is a chance that the business environment is going to be worse than your worst scenario. In addition, stress test your operating plan to see what happens if your accounts receivable increases two to three times in the near term or your churn increases dramatically. Tactically speaking, you should do what you can do to pull down your debt line, seek convertible or SAFE notes from your insiders, request your customers to prepay and ask your vendors for payment extensions. Make adjustments in cash burn right now, but also be vigilant knowing that you may need to make more adjustments in a quarter or two.
Prioritize existing customers
Existing customers is where you’ll be able to secure most of your growth this year. Make sure to keep them happy. Connect with your customers and encourage them to share their pain points during these unstable times. Listen to them closely and explore building new products, extensions or features that they will need and ultimately, that you’ll be able to cross-sell to your existing customer base.
Play offense to stay competitive
Most of the time, start-ups need to be defensive in this environment because they’re doing everything they can to protect their business and manage overhead spend. However, remember that your competitors are also going through similar issues. If you can allow it, now is a good time to figure out how to out-market and out-sell your competitors and how to out-develop and out-engineer them so that you come out of the downturn stronger than you went into it. For example, if you’re able to do this, consider providing a freemium offering to increase market share and distribution for future monetization when the market stabilizes.
Value your employee base
This is the hardest part of our discussions and it’s painful to address. A software company is nothing without its people who fuel product innovation and build company culture. But most companies will have to make unpleasant and tough decisions in order to preserve cash. We see this at the onset (and during) every recession. Before taking drastic measures such as letting people go, make sure to look at all kinds of options including temporary pay cuts and furloughs. If you are in the undesirable position of having to lay people off, make sure your employees have enough runway with their health benefits, as well as extend the time period to exercise their RSUs or options. Last but not least, we are here for you. Sapphire’s Talent Network team can make introductions to companies that are hiring so that your employees who have been let go can have a soft landing.
We realize that the situation is changing moment by moment, but we remain cautiously optimistic about the future. As we go forward, we’ll be sure to keep our community updated by sharing more best practices and what we’re hearing from the community. If you're a GP or LP, we suggest checking out content on OpenLP where people across the venture ecosystem have been sharing how they are working through the impact of COVID-19.
In the meantime, stay healthy and continue building your company of consequence!
Disclaimer: Nothing presented herein is intended to constitute investment advice, and under no circumstances should any information provided herein be used or considered as an offer to sell or a solicitation of an offer to buy an interest in any investment fund managed by Sapphire Ventures. Information provided reflects Sapphire Ventures’ views as of a particular time. Such views are subject to change at any point and Sapphire Ventures shall not be obligated to provide notice of any change. Sapphire Ventures does not solicit or make its services available to the public and none of the funds are currently open to new investors. Past performance is not indicative of future performance.