Crazy period! How are you doing?

Sent this email last Friday (March 13, 2020) to Techstars Montréal AI alumni. Sharing it broadly as I’ve started referring to it in other discussions. Hopefully it’s helpful to more people.

Hey everyone!

I wanted to reach out to all of you amid the turmoil of the current COVID-19 pandemic and see how you’re doing. Things are unfolding pretty fast and it’s currently very hard to understand what the next few months will look like. Leading a startup is never easy, doing it in such times will be pretty brutal.

There is a deep dive on the calendar with the vast majority of you next week. As usual, happy to talk about anything that’s on your mind that will be useful for you. In the meantime, I wanted to share a few thoughts and recommendations from discussions and shared experiences between Techstars Managing Directors and the Investment Team.

Crisis have happened before

I started working on what became Context.IO in 2008 and vividly remember when the R.I.P. Good Times deck from Sequoia started to circulate. Some of my colleagues at Techstars were leading startups during the dot-com bust in 2001. Things will come back to normal, they always do, but not everyone will make it through. Nevertheless, awesome companies lived through or were started during the years that followed 2001 and 2008. Job #1 is to figure out how to survive and to do it.

We’re in the early days of this one. The number of declared cases is still increasing rapidly in most regions. Authorities in Canada, USA, and Europe are all responding to this in their own way and it’s hard to say where, how and when things will stabilize. The good news is, after a few months, it seems to be getting back to normal in China and South Korea. Until it does so in other places as well, it’s hard to predict how investors, customers, and employees will behave.

Impact on fundraising

While private VC funding doesn’t directly follow variations of the public stock markets, they are eventually influenced by them. A sustained drop in public market valuations could cause LPs to review their allocation of capital to private venture funds.

In the meantime, there’s still tons of capital committed to venture funds and these VCs still need to work deploying it on great companies. However, it’s safe to assume new deals (as opposed to follow-on deals) will be harder to get. In other words, work with the assumption that no new money will come to you in 2020 and probably further. It might but assume it won’t. If you have a round opened with commitments made, close it, close it asap. Even if it’s not the full round amount, do what you can to close what’s been offered.

Remember it’s never done until the money hits your bank account. Even if the term sheet is signed, due diligence went well and the investor is committed to the deal, they still need to do capital calls to LPs before they can wire the money to you. In crazy times, some LPs may suddenly stop answering these calls.

For those of you in Canada, look for grants and other non-dilutive funding you can tie your company’s mission and product to, even the small ones. Do you have a pre-approved credit line? While unlikely, it’s not outside the realm of possibilities to see that credit line pulled away and no longer being available. Consider drawing that money now as an option to capitalize operations.

Here’s a good deck from Mark Suster (Upfront Ventures) expanding on that topic.

Impact on burn

When reviewing options to adjust burn, don’t forget it isn’t just about reducing expenses, plan for revenues being lower than expected as well and customers taking longer to pay their invoices. Figure out which levers you can play with to manage costs and extend your runway.

Consider consulting gigs that bring new revenue, even if it’s at the cost of rapid product development. If that revenue is related to expanding, adjusting or implementing your product for a customer, go ahead and take it.

Figuring out an action plan

Plan A should be about bootstrapping through the next 18 months. Plan for the worst, hope for the best! There’s a very fine line between panicking and making hard decisions quickly. So much of the coming months depend on events that have yet to unfold so think of planning in terms of triggers (event X happens, deal Y doesn’t materialize by date Z) and actions to take when they materialize. This will hopefully put you in a state where, despite things being very unpredictable, your actions have been thought through and you are less in a reactive mode.

Some advice as you figure that out:

Temporary pay cuts

• They tend to be better than laying off people you want to keep
• Executives get them before everyone else does. A good rule of thumb is the biggest your share of the cap table is, the earliest your salary gets hit.
• One large pay cut is better than a bunch of small one
• Equal pay cut across the board impacts employees unequally. Don’t hesitate to adjust cuts based on individual needs and responsibilities. A dev with two young kids isn’t in the same situation as someone living on their own away from family who isn’t in the same situation as someone with a strong local support network they can rely on.

Communication and contingency

• Do it often, even if it’s just to reassure everyone you keep an eye on things
• Identify backups for key decision makers. If they become sick and need to get some rest, who takes over while they’re out should be known in advance.