An Actually Useful Coronavirus VC Blog Post
Originally posted on 3/11/20
Collin Gutman is a Co-Founder and Partner at SaaS Ventures, with over a decade of cumulative experience as both an investor and a startup founder. Prior to founding SaaS Ventures, Collin co-founded Acceleprise, the world’s first pure enterprise tech accelerator. Collin also has been an entrepreneur, having founded WorkAmerica, a social impact workforce development startup. Collin holds a BA cum laude from Yale University, and is an avid DC sports fan.
In the past week I’ve seen almost every VC write their own take on coronavirus. Some say “well, you’re screwed.” Some say “the best companies were founded in a recession!” Others tell you to pull back spending, while some maintain that great companies need to stay aggressive. Most try to put out facts and historical contexts without offering an opinion. And of course, every startup is different – their funding situation, investors, customer base, net burn/path to breakeven – all of these are critical factors define what path a given company should take in the face of uncertainty and adversity making one-size-fits-all advice useless.
But founders still need advice on their core dilemma: if I continue spending into a recession where my customers stop buying then I’m in trouble, but if I cut my burn I’m almost certain to miss my growth targets for the year.
With that in mind, I’ve tried to give my portfolio companies helpful advice, which I’m consolidating here – with the caveat that every startup is different – so apply my advice in a way that makes sense for your context.
The major point to take away from this article is that startups can afford to be more reactive than public market investors and public companies. While an investor may lose 20% of his or her portfolio in a given week because of the macroeconomic climate, startups usually are looking toward a 3-6 month time horizon when they have to deliver results to their board. So if you’re worried about coronavirus’ impacts hitting your customers and therefore your ability to grow, wait a month to go on a hiring spree or cut your burn. Each week will give you more information on the long-term impacts of coronavirus and you’ve got the luxury of letting things play out before making dramatic decisions.
Your next move is to analyze how your burn and ability to ramp match up with your funding timeframe. If you use the general rule of thumb that you need to double over the past twelve months to stay fundable, you can do some projections. If you’ve got six months of cash or fewer, you’re probably going to have to fundraise in a time of coronavirus-induced pullbacks. You can’t cut burn if it risks slowing down your growth rate. So you need to leave your chips on the table and sustain an appropriate growth rate to get your fundraise done. If you have 12+ months of capital or are currently fundraising, you’ve got a much greater set of options. Once you assess the situation in 4-6 weeks, you can choose to remain conservative for 3-6 months, then invest in hypergrowth. In that way, you can prevent yourself form burning your cash at a time of panic while still having the resources and time to have a 12 month – 2x revenue growth ramp before your next fundraise. And if business as usual resumes in 4-6 weeks you can invest just like you would have ordinarily. Just don’t spend your cash at a time that feels uncertain, or timing may put you on the wrong side of the CAC/LTV equation.
Hopefully that context provides a bit of a playbook for how to handle the next 60, 90 and 180 days under a bear and bull coronavirus case. We’ll certainly publish an update in the coming months revising this opinion, but hopefully the above lessons will both alleviate a bit of pressure and outline a plan to follow.
And above all else, if you’ve got willing investors or a round that can be expanded – raise an extra 3-6 months of cash. Taking on a little bit of extra dilution is far better than running out of cash while investors see their world burning.