Yes, this is another COVID-19 article. So what makes this different?
I’m writing from a corona clinic- experiencing this both as a patient and an investor and stakeholder amidst it all.
So first off, I am not a licensed medical practitioner, nor doctor, though I have seen an uptick in medical licenses “overnight” this month on every social media platform..anyways this isn’t going to be medical advice.
I’ll start by describing the scene in the newly minted “corona” hospital and clinic in Austin that I’m in right now:
Doctors and nurses panicking…hospital is out of masks… medical system being pushed to its limit.. the government acting “later” than it could have (due to politics “potentially”)… it’s like the scene out of a movie… except MOST people are only “kinda of sick”
As exciting as that article would be, this article isn’t about that at all but it is important.
Let me explain why…
The impact of COVID-19 has been profound and its effects are being felt across the startup ecosystem. We all know and agree with this. What we can’t agree on is its total impact and how long it will last.
Based on what I’ve seen in China- funding will slow down temporarily – I estimate 4 to 8 weeks. It will not stop. Fundraising has just started its own remote transition and investors are slower than startups by nature.
It was a shock to the system, but investors are starting to book meetings again. Not everyone is. Some investors are still in panic mode, but I assure you that governments are going above and beyond to contain the threat of the virus.
In China, VC’s and investors are already going back to work and doing deals. Just 4-8 weeks post-corona. They didn’t just sit around during the outbreak either, they still looked at deals and completed deals in the pipeline.
They have been cautious about making major commitments yet, but everything else seems to be getting back in line with a stronger, more remote focus than before, and that means new opportunities for startups and investors.
Why does this matter? The future of work has always been remote, but not the future of investment. Let me explain why this is, it’s a simple answer.
The bro’s, Ivy MBA’s, rich old white and asian cis-male gen-x + boomers that still run the top VC (+ LP’s in the funds) are being forced to switch to innovative remote tech (goodbye skype, gotomeeting, google+)
The transition won’t be easy, and it won’t be without challenges, but being the CEO of an online accelerator that helps startups raise funding remote (with an exit in the online investment space), we’re finally in the transition.
This will be a game-changer for most startups, it will just take time for them to get the ropes and build relationships online- it’s always been a numbers “funnel” with investors, now even more so.
Investing is going remote, and it’s happening sooner rather than later due to COVID-19.
Think about it. If most relationships and marriages start via apps and online today- important decisions (to most people), it was only going to be a few years until even startup investment transitioned.
It took a crisis to get non-millennial generations on board (kicking, screaming, and yelling snowflake all the way I might add) but now we’re seeing a transcendental shift, and I promise it will continue.
We understand that it’s scary to see news headlines of how everything is closing, but remember that the ongoing government response reduces the odds of a worst-case scenario for the medical system.
A billion people got swine flu. A billion people will likely get COVID-19 .
Infection rates are always UPDATED after an epidemic to showcase that actual infection rates were 10-100X off the estimates, even now we don’t have enough test in Texas STILL, that means chance of death is actually MUCH lower.
Why the panic? If everyone becomes sick all at once, there are simply not enough hospital beds.
So as a community you have to balance infections out over time (+hopefully find a cure), lower infections in at risk populations, and build herd immunity in low risk groups.
Statistically, you are more likely to die on the highway today driving home.
But that doesn’t mean that this isn’t serious either. Many people are sick and some people are dying, and there is a high risk to specific demographics and population groups with chronic diseases.
I’m under 60, should I go on vacation, it’s so cheap! And honestly, I was booking my flight, then…
I woke up short of breath.. getting up and down the stairs felt like a marathon. And it was a tough two weeks. I had a fever, nausea, difficulty breathing and getting around- it was like the flu + getting punched in the stomach a lot.
Silver lining working from home = we’ve completed initiatives at a rapid pace (maybe 5x~ productivity) but not sure if that’s because remote or because team can’t leave their homes.
We have several new systems and updates to push out internally that would have taken months – which means we hope your teams are 10X’ing it too in relation to your own products and companies (and not just panicking).
I know the macroeconomic damage is disconcerting but even restaurants are pivoting to temporary groceries, going online, etc.
The world has not shut down nor have millions of businesses shut their doors, we’re all pivoting temporarily and governments are moving faster than any bloated bureaucracies have in my life.
What about stocks? The market is down and volatile!
The news in the 90’s decided that their job was to scare us into never leaving our homes…and they’ve finally succeeded.
It is important to remember that public markets are perception-based and reporters have been getting paid clicks off “recession” post since 2008.
And right now they are tweeting and retweeting corona + recession every hour.
And we’re eating it up like toilet paper is going out of style (I knew it was you that bought up all the TP!)
Ironically, someone sent me a Jason Calcanis article last night about the big one and I said ,”Wow he predicted it”.
Then I checked the date.. it was two years ago.. nothing came of it then and we’re not seeing it happen now either.
Investors read the news and are market-driven (the best ones know the markets are volatile and play the markets or wait out) but startups are a small part of angel investor portfolios
So now with volatility, they are overbalanced with startups. Thus angel investors do two things: they either sell public stocks and invest even more privately, or they hold off on investing and wait for the “correction”.
That means as a startup you need to be increasing your outreach in your funnel so you find the investors looking to invest more in startups vs. “holding” – some investors may tell you no. That’s how it works! But talk to enough and you’ll get a yes.
We are already seeing companies around the world adapt quickly to the new dynamic we all face: reliance on remote work, delivery apps, and an exploration of alternative digital channels and tools for new business opportunities.
Investors will catch up too. If not, they will die and their kids will get their capital, and they’ll invest in you. It’s actually part of the investment cycle, those who funded the dotcom boom are now retiring and risk-averse.
As Goldman Sachs and every financial report I’ve read in the last 5 years puts it, “we’re on the precipice of the greatest generational shift in wealth in human history”.
If you have a digital value proposition: this is your time to shine and prove your value to customers.
Crises often present an excellent opportunity for innovation. And as entrepreneurs, it is up to all of us to adapt and grow throughout these times of great uncertainty- use that brain and innovate.
There are changes in the horizon and it is our responsibility as an accelerator partner to startups to provide guidance and encouragement on how to think and proceed considering the pandemic.
TLDR – Here are some quick takeaways from the COVID-19 update we held this week regarding the impact on the startup ecosystem and the investment landscape and outlook:
1. Startup Investment Will Temporarily Slow Down 30-60 Days, But It Won’t Stop
We expect some investment time horizons to be pushed as well as for some investors closing to take longer. Moreover, investors, namely VCs, will likely adapt to the structural changes brought on by the pandemic as they continue to search for deals and use it to their advantage to get better valuations, yes that means valuations will see a hit 25-75% potentially.
2. Remember that VC’s have to deploy their capital – that is their job, we actually are required by our PPM’s to deploy capital in a very small time frame so we can’t wait “too long”.
This means they will not stop searching for deals even if it means doing so remotely (via Zoom). So you are encouraged to continue your investor outreach efforts, if someone responds “I’m taking a pause right now for Corona”, capture their best contact email and follow up in 3-5 weeks.
3. Close Out Any Current Fundraising Rounds and Start Focusing on Execution
If you are currently in the middle of a raise, it would be in your best interest to close out the round as soon as possible or at least close the investors not closed.
This also makes sense if you’re close to finishing the raise – just close it out, get the money, and focus on executing. Volatility scares many investors, namely angels, so try to close up any rounds now before your commitments run for the door.
Later on, once the global situation ameliorates, you can restart your fundraising efforts at a higher valuation because you hopefully will have made more progress. For now just focus on doing whatever you can to stretch out your runway and ensure the livelihood of your business.
4. Keep Your Investors (and Customers/Clients) Updated on Your Company & Products
Believe it or not, this is an excellent time to stay in close touch with all of your stakeholders. You want to keep them looped in as to how your business is making sense of the pandemic, how your operations are affected, how you are adapting, and what you plan to do in the short- and long-term.
Show your investors that you are doing everything possible to keep your company afloat by planning now. This presents you as a conscientious founder and/or CEO. This is a character quality that investors love to see and highly value in their investments. The idea here is that you should be doing whatever you can to use this crisis to your benefit.
Make your customers and investors feel good about what you’re doing, reassure them, and keep driving the relationship. Remember that times of crisis create unique opportunities to connect.
5. 2020 Will Be Tough & Global Business Will Continue (Although Not Quite As Usual)
Although it may seem like the world has shut down indefinitely, it has not. Business is still very much alive everywhere. People will continue to shop and consume, primarily online. This means that most digital offerings related to online entertainment, productivity, information, or shopping will continue to thrive- in fact our CEO is in touch with many companies seeing increased online sales.
Moreover, this unusual situation may serve as a ramp to convert new customers into loyal users. Take for example consumers who are used to shopping for groceries in person but now have to resort to online shopping and delivery. If they end up liking this service, do you think it is likely they will simply stop using it once the pandemic and quarantine clears out? Not necessarily. If they find value and convenience, they will probably continue using that product or service.
It is also likely that the economy will experience the effects of pent up demand in the coming months both in consumer marketplaces and investment communities. Lastly, even though the public (stock) markets are facing immense downward pressures, it is likely that a lot of money will move into the private markets (i.e., private equity, venture capital).
6. Use H/A/R/O (Help A Reporter Out) to Drive Your Brand Story
For any companies that are trying to tackle problems which are now being highlighted by the COVID-19 crisis and your business offers solutions to mitigate those problems, reach out to H/A/R/O. In doing so, you can reach out to reporters and share your two cents on the pandemic and also your company.
Right now the media sector is hungry for content and eager to highlight any solutions that are helping solve this crisis. So figure out what story you want to tell, what resources you have to give, and get yourself in the news – maybe they will do an article on you!
7. Seek Emergency Funding Where Possible
Small businesses, including startups, are the backbone of the American economy. A crisis like this inevitably leads to slow downs and cash flow problems. The government is well aware of these issues and is prepared to support you, where possible.
If your company is desperately in need of funds, as in your business needs money a week from now, then you need to look into relief loans provided by the SBA which can cover your short-term losses.
These loans vary by states and take about two-to-three weeks to process and disburse. Newchip will be providing you with more information in the coming days and weeks on how to access these resources.
You also have all kinds lenders available if you are making revenue and need cash tomorrow (if you’re early stage there are MCA’s, but we recommend going to your investors for a loan first!)
Here are a few platforms that offer help:
- Kabbage – Loans & MCA
- BlueVine – Loans
- Clearbanc – Loans
- PNC – Line of Credit
- Forward Financing – MCA
- Total Merchant Resources – Loans & MCA
- SBA – Biz & Emergency Disaster Loans
We are all facing challenging times but there is hope. That is why we encourage you to make the most of this unique opportunity to propel your business and cement your value proposition to the world.
For now, please stay safe, take care of yourself, and keep your head up high. We’ll be updating this with a few more resources come next Tuesday as well as ways to hit up your investors to help you get through the next 30-60 days.
8. Now more than ever, the world needs courageous entrepreneurs who are ready to embrace change.
If we can help in this way let us know, I recommend scheduling 1-1’s with advisors and mentors and getting feedback and taking a full day to strategize with your teams.
If you need to delay a payroll, ask your team and be transparent about it, don’t surprise them last minute, get their buy-in and get the team on-board with everything in these trying times.
AGAIN, I urge you all to not panic and rather than plagiarizing; I want to connect you to three very different points of view on the subject because education on ALL points of view are important to informed decision-making:
- Sequoia ‘Black Swan’ memo could steer companies off of the COVID-19 cliff by Lani Rosales
- Sequoia Capital is Wrong (and They Don’t Get Work Tech) by Bret Starr
- And I can’t forget the original “Coronavirus: The Black Swan of 2020 Memo by Sequoia Capital
Last but not least, I wanted to share some questions to be focused on strategically between you, your cofounders, and your board/advisors.
*Note that we’ve edited this from a Wilson Sonsini memo for public companies so that it is focused on topics relevant to startups:
A. Advising Boards of Directors
- How should our Board exercise its fiduciary duties, including its duty of oversight, in the current environment?
- What topics should the Board discuss with management more frequently?
- Company’s operational response to COVID-19, including with respect to employees, supply chain, customer, and community
- Effect of the current environment on the company’s corporate strategy and risk
- Internal and external communications including with employees, governmental entities, and stockholders
- Effect of the current environment on the company’s operating plan and ability to achieve guidance previously delivered to investors
- Succession planning and incentive compensation matters
- Access to capital, including the ability to draw on existing credit facilities
- How do we balance the Board’s oversight duty with management’s need to run the day-to-day business of the company?
B. Reporting (Note: For Startups think about talking to your existing investors, especially major ones, and those you are in discussions with)
- Do we need to update the risk factors in our last periodic report before our next periodic report is due?
- Our retail locations/manufacturing facilities/fulfillment centers have been required to close—what disclosure obligations do we have to our investors?
- As we approach the end of our quarter, we’re not sure we’re going to meet our previously provided guidance—what issues should we think through?
- Should we continue to give guidance for the next quarter and the rest of the year?
- We have an executive officer who has tested positive for COVID-19—what, if anything, should we disclose about this to employees and investors?
C. Liquidity and Capital Raising Considerations
- The equity markets and debt markets—both equity-linked and straight debt—appear for the most part to be closed. What alternatives are available for raising capital in the near term?
- We do not currently have a line of credit or a debt facility: should we attempt to put one in place to ensure access to funds in light of the uncertainty as to when the equity and debt capital markets will reopen? What types of terms are available in the current environment?
- We have an existing line of credit/debt facility: should we draw it down entirely to add cash to our balance sheet proactively or to avoid a freeze in the credit market that could lead to banks being unwilling to lend?
D. Financing Emerging Companies
- Are any venture capital deals getting done in the current environment? Are investors requiring unique terms to get deals closed?
- What considerations should be given in down round financings?
E. Sheltering In Place Orders
- Is my business impacted by a shelter in place order? If so, must we shut down? What minimum business operations can we keep running?
- Under these shelter in place orders, are all pharmaceutical and biotechnology companies exempted as “Healthcare Operations”? Can we say that our medical device company falls within the exception?
- What expenses must the company reimburse while our employees work remotely?
- We’ve got employees who cannot work from home. Can I require them to use vacation or sick leave?
- We need certain employees to be at the printer next week. Can we require them to be there notwithstanding the order?
F. Employment Law Matters
- What must I do to protect my workers from COVID-19?
- A worker has tested positive for COVID-19. What should we do?
- What questions may we ask employees about their current medical state/health? Are there privacy considerations we need to consider when asking these questions?
- Can we ask employees, independent contractors, and other visitors to submit to thermal screening?
- When should employers be concerned about compliance with HIPAA?
- How do we implement and monitor an employee telecommute policy?
- Do we have to allow all employees to telecommute?
- We have limited or canceled business-related travel. Can we also require employees to limit or cancel personal travel plans? Can we require them to tell us about personal travel?
- Some employees who can work from home have been affected by school closures and don’t have access to childcare. Must we allow them to take time off or provide them with a flexible work schedule to accommodate childcare needs?
- We need to lay off employees in order to control costs. How much notice do we have to provide? What about severance?
- Can I delay an employee’s start date, or withdraw a job offer, because of COVID-19 concerns (e.g., recession or travel limitations)?
G. Employee Compensation Matters
- What do we need to consider if we are going to decrease salaries for executives or across the board, either unilaterally or in exchange for something?
- We have equity awards that vest based on total shareholder return; can we and should we modify the terms of those awards to take into account this black swan event?
- Our annual operating plan and annual bonus plans were established before COVID-19 and we know that the goals are no longer realistic. Can we and should we modify our annual bonus plan to adjust for this? What are the considerations for doing that and when would be good timing?
H. Merger and Acquisition Issues
- Could recent developments and effects on a company constitute a “material adverse effect” (MAE) that would allow a counterparty to terminate or refuse to close a deal—and, for deals that have not yet signed, should COVID-19 be explicitly excluded from the definition of an MAE?
- Will the disruptive effects of COVID-19 delay transactions—on the front end, from a longer due diligence process, and after signing, to obtain regulatory clearance or satisfy closing conditions?
- If a pending transaction becomes delayed, what are both parties’ obligations under the merger agreement for consummating the transaction and what is the need to comply with interim operating and ordinary course covenants?
- Financing considerations—will financing will be available? What kind of “flex” provisions will be imposed, ensuring closing conditions align with the closing conditions on the acquisition agreement?
- Will changing market conditions have an impact on fairness opinions from financial advisors and financial analyses used by boards and management? If so, how should we address this impact?
- In private company transactions, how should risks be allocated through indemnity provisions, or how should valuation gaps be addressed through earnouts?
I. Contractual Issues
- Is the force majeure clause in my contract triggered by COVID-19?
- If there is no force majeure clause in my contract, how could COVID-19 implicate our rights and obligations under the contract?
J. Courts and Regulatory Agencies
- Our company is in litigation—are the courts open? Are we still required to make filings on current deadlines? What effect will the current environment have on court hearings and trials?
- Is the SEC open for business? How will the current environment affect the review of our filings to raise capital or close rounds? (Editor’s Note: Reg D filings should be fine)
- Is the Delaware Secretary of State open and accepting filings? (Editor’s Note: Yes for now, they have a robust online system)
(End of Edited Wilson Sonsini Memo)
Not all of those topics will apply to every startup. And I know some of you will be looking to us for answers, and we tackle them as we can but know that some will have to be done on a case by case basis.
(We’re collecting up a bunch of additional and FREE resources and will be updating this blog post on Tuesday so stay tuned.)
For our companies, post in the forums and make sure to set up 1-1’s with your advisors next week. If the question is outside of their experience they will send it over to us and we’ll do our best to get you answers.
Again, we urge everyone not to panic, or act in a frenzy, or make decisions without weighing pros and cons AND if you are a brick and mortar- use your community and move fast to digital, delivery, to-go, or on-demand!
Have a great weekend everyone and be safe out there!