Muddy waters and lockdown

Writing this from Stockholm - it really feels good to be back in Europe, away from the US hysteria and their own way of dealing with chaos.

The past 4 weeks have been surreal and unfolded extremely quick. We’re living unique times, with many unknown variables and uncharted territories.

Unknown variables means uncertainty. Uncertainty means higher risks. Higher risks means losing money, for both investors and founders.

For some investors this is a rather new situation, augmenting drivers such as panic and greed.

Why panic - well, overnight the market value of the assets under management halved.
Why greed - the assets available for purchasing from the market are at half price too.

Does it make sense? No and yes.

No as in fundamentals of a company don’t change overnight. One day you sit on a healthy foundation executing a strong plan ahead. The next day everything is fundamentally different and you need to adapt for a Covid-19-degraded market.

Yes as it’s a textbook example about how the macro environment is collapsed by an unexpected event triggering rollover effects for any great business, altering its course in a dramatic way.

This is a systemic risk, usually accounted for by investors’ due diligence. A coronavirus type of event is not a common occurrence, it is arguably a white swan - a market reset has been anticipated for some time now.

So what can we make of it?

It is likely that some investors didn’t even deal with this kind of situation before - with notable exceptions, most people in the VC business, at least in Europe, are in their 30s, and hardly experienced when it comes to dealing with wartime management.

The theory frameworks they are taught to use for doing their job have become suddenly more complicated - the last period with somewhat similar circumstances was 10-12 years ago, when they were probably with different jobs or still in school.

The theory frameworks they are taught to use for doing their job have become suddenly more complicated - the last period with somewhat similar circumstances was 10-12 years ago, when they were probably with different jobs or still in school.

On the other side, most entrepreneurs are actually used to operate in this type of environment - being in the unknown and dealing with the unexpected is standard for people building companies. However, this is a particularly opaque situation as i) there is no timeline in sight for a macro resolution and getting at an equilibrium and ii) because of that, you cannot plan and budget accordingly.

Subject to stage and vertical, that means the 2020 resource allocation needs to be changed i.e. changes in headcount, different cash management, customer discounts etc.

Particularly laying off people is very challenging as you are trying to build a long lasting org and it is not easy to hire great people anyways. And they are your people, not just numbers you need to accommodate in a budget. Quite frankly, the most difficult time of my life as a 15+ years entrepreneur was when I had to lay off half of my team so I could cut expenses for survival, back in 2009-2010.

It is what it is and you gotta do what you gotta do. The more the unknown persists though, the more likely it is that startups will dry out and die.

We’re dealing with a 2-in-1 context: a healthcare crisis and an economic recession, one triggered by the other. Until we get a resolution for the first, it is basically impossible to anticipate diligently the circumstances for operating in the second one.

We are most likely looking at a U-shaped trajectory spread on a 18-24 months span, with the following 3-6 very much under day-to-day basis, probably the bottom of the U. Thereafter it will be more difficult to re-create a decimated environment and get to a healthy overall context. Time consuming and expensive.

The good news is that if you come out of it, you will be in a stronger market position.

The bad news is that if you are looking to raise today or in the next 3-6 months, this is not ideal.

The VC market has locked up and investors are pulling the rug from under founders - effectively frozen, straight talk and elegant explanations - with the nuance that most of them are still open for business in the sense of not saying no to look at a bargain and/or simply taking pitches because their pipeline is as important as their portfolio (here is a handy list).

Nevertheless, now it is not a good time to meet strangers. Let me explain a little.

When pitching, your job as a founder is also to build a relationship, to sell yourself, to make the investor like you and feel a sense of connection and obligation to you personally so that they will eventually give you the money to build a business mechanism that you are ostensibly there to explain.

This is hard to do via Zoom only, when the whole world is under quarantine.

It is hard for investors to get a good read of the dynamics, the hands-on approach and the DNA of the team - the investments are made based on teams at least on equal grounds as on markets and on opportunities per se.

It is equally harder for a founder to get a read via a video call on the VC team relationships and vibes, and make an educated guess about how they will treat you after they give you the money.

And assuming things go further than the pitching call, the lack of future clarity will give founders little leverage to negotiate reasonable terms with people they have never met in their life anyways.

The mileage can vary of course i.e. no-brainer opportunities, already-existing vc-founder relationships etc.

This is the period founders need to keep their heads down and make the product/business 10-100x better keeping it alive with the available resources. Because growth - what investors are interested in the most - is not going to happen in this period. Kind reminder: this is the best time to start a startup.

The current uncertainty will also lead to odd situations such as investors not honoring their commitments. Yes, it is unprofessional but this happens sometimes. There is even a rule about who is doing it. Some even try to explain this behavior.

These individuals will never be named publicly because this is a relationship business. Founders don’t want to burn bridges and investors are friends with each other. And deal sharing opportunities are more frequent and important than “that time I screwed a founder because I coronavirus panicked” situations. It is part of their job. And no, I don’t buy the rep theory in this case.

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