Mar 19 2020

3/19/2020 Thoughts

I had a few things on my mind related to the startup environment right now as it relates to Covid-19 and the massive market disruption that we’re in the middle of. It’s a struggle to get them all sorted out in my mind so apologies in advance if these are a little disjointed. As you can imagine we’ve been having conversations all week across the Foundry portfolio (which includes not just companies but also our ~ 35 fund investments; between those we have look-through into a few thousand companies). With that, here are some general observations on the market as well as a few things specific to startup companies (relevant across stages).

We’re still in the quiet before the storm phase. I’m hearing from a lot of companies that this disruption hasn’t affected them. They’re still seeing strong sales pipeline (although this is concentrated in deals later in the pipeline – be careful that you’re watching top of funnel metrics as well). While there are some businesses that have the potential to benefit from our new WFH reality (Zoom is the classic example but we have a handful in the portfolio that fall into this category), the majority I think are simply seeing a brief bounce due to everyone’s schedules freeing up and people having time to actually finish evaluating your product. That’s great, but the truth is that most companies haven’t fully internalized the new economic reality that we’re facing (see more on that below). The result is a brief period of “business at usual, but from home” that is driving some near term sales closes for companies whose longer term prospects aren’t as bright as they may appear once businesses start getting their arms around just how deep an economic downturn we’re likely to be facing. And to be clear, it’s going to be deep.

Companies with direct consumer, travel or related businesses are already seeing the downturn. We have a few companies in the portfolio who have businesses that relate directly to travel (or indirectly to that), people getting together, consumers out shopping, retail and restaurants, etc. These businesses are already seeing a significant impact on their businesses. My point is that they are tip of the spear and are seeing the effects of the downturn first because of the specifics of their businesses. It will ripple down further. Your business needs to plan for that.

We’re about to see the first in a few waves of layoffs. Companies are scenario planning around just how bad this is going to get and many are looking at some level of staffing cuts. These take some time to plan and the reality is that the market has not yet realized just how many people are going to start being laid off (outside of the startup market we’re already seeing this in other businesses). We’re going to start hearing/reading about these layoffs over the next few days and this will accelerate next week.

Prioritize cash preservation over growthNow is the time to be careful about your cash reserves and spending. Many companies had been leaning into growth – and spending at a very rapid rate to support that. The advice I’m giving most of the companies I work with is to not worry about 2020 growth rate but to focus on preserving cash so we can have the greatest possible optionality when we eventually emerge from this downturn (and we have no real sense right now just how hard things will get). To be clear plenty of companies will grow (some a little, some a lot) through this – but spending ahead of some assumed growth rate right now is a bad idea. Great companies get started in downturns and plenty of great companies that had already been started see their businesses emerge stronger then ever from downturns (both for similar reasons around less competition for resources, better talent available, less expensive marketing, etc.). But you need cash to take advantage of that and now is the time to make those adjustments. Drawing down your debt (as many people have already pointed out) is probably a good idea now as well – you want that cash on your balance sheet (there are some cases where this won’t make sense, which is why I’m avoiding a blanket “you must do this” statement around debt.

Stress test your operating planEntrepreneurs are optimists and the temptation is to rationalize how this downturn may actually be good for your business. Most of you will be wrong (either completely or in magnitude). You should be adjusting costs now, full stop. You should have at least 2 other plans that you’ve considered – a zero growth plan and a 25% revenue drop plan. Before you tell me that this isn’t going to happen to your business, just do the analysis and know where you’d stand in these scenarios.

More, not lessI’m sorry to say this, but the reality is that you should be cutting costs more rather than less right now. Whatever your first instinct is, you’re probably off by somewhere between 20% and 50%. Having seeing countless companies go through this (more typically not in such an emergent time), the vast majority of the time companies look back and wish they had adjusted more.

Stock exercise. This is related, but random, but I’m suggesting to the companies I work with to extend option exercise periods extensively for employees that you have to lay off. Most plans require employees to purchase stock within 90 days of leaving (this may vary but 90 days is most common). This feels harsh.

Consider extending COBRA. It’s hard to lay off employees – especially into the job market as it will likely exist over the next few months. And hard to balance being fair to those you’re letting go and preserving cash to continue to operate your business with the employees who are staying at the business. One thing that some companies are doing (and this varies based on capacity and inclination) is trying to offer a few months of paid COBRA for employees they’re letting go.

I just reread this post and it’s more pessimistic than I actually feel. Markets cycle. Even when the disruption is something large and unprecedented like Covid-19. We will get past this. The markets will rebound. Sales will come back. Great companies will emerge. I strongly believe all of that. But I hope the advice above will be helpful to you as you think through navigating the early stages of this crisis and best prepare your business to survive.