Leading in a COVID World: Are Your Portfolio Companies Prepared?

The current economic crisis is unprecedented and there are understandable uncertainties as to how long this event will last and what the world will look like when it ends. Making plans, or rather changing plans to adapt in this current COVID-19 climate is the name of the game. The pandemic-induced economic shutdown came so abruptly, as if a switch were turned off in March 2020. In our previous blog post, we shared insights from our investor roundtable on their experiences with prior economic downturns and their philosophies on how to approach investing during uncertain times. Today, we'll be diving deeper into the nuances and unique aspects of the COVID economic crisis with more insights from our investor panel.

With stay at home orders around the globe, certain industries have been hit much harder than others. Take retail and food services, for example. March and April proved to be a real test of their fortitude as sales plummeted more than at any point since records started in 1992 (source: Forbes: The Economic Collapse in 6 Charts):

This is an obvious marker of the effects the shutdown has had on the consumer because sales had proved resilient before, including the previous financial crisis.

Yet not every business has experienced pain in this crisis. Consumers have flocked to home and garden stores, food delivery, and streaming and video services. A glowing example of this can be seen in teleconferencing -- Zoom's stock, for example, has more than doubled since the start of the year, giving the company a market valuation of roughly US$42 billion.

While these beacons of light are out there, we are still struggling as a whole to see beyond the pandemic. It’s enough to make most of us wish for simpler times, just a few months ago.

Should investors still consider new investment opportunities during the crisis?

During our recent roundtable webinar, three investors shared their insights on what they are looking to see from their portfolio companies during the COVID economic crisis, and how they are viewing new investment opportunities in this unique economic climate. One theme was that while investors are being more selective, there are still solid opportunities to consider. Lokesh Sikaria, Entrepreneur, and Founder of Moneta Ventures, said that his firm is still looking at exceptional opportunities that come through. He shared that in the past, where 50% of companies identified by the firm made it past the first screening to their team meetings, now this figure is less than 20%. Sarah Imbach, Angel Investor, Advisor, and Entrepreneur said that she plans to talk to twice as many companies than she typically would have to find the deals that she's going to write checks into. As a result, she feels that the caliber of deals is going to improve and she's more likely to get a better price: "There was a company in Seattle that had a $25 million turn sheet yanked. They are out raising at a $15 million cap. Those deals are happening and I would never have looked at something in a $25 million as an angel. You can't get enough to make the economics work. But I would look at it at $15 million because the company fundamentals didn't change." Dan Goldsmith CEO, Advisor, Investor, and Board Member, also noted that, in some ways, there's going to be either similar or maybe even more deal flow.

What are investors expecting from their portfolio companies with regards to a COVID response?

Our experts agreed that the ability for companies to pivot market segments, along with the messaging and marketing decisions, is key today. Leadership needs to be flexible and be able to let go of the original plans they set forth in January, and chart new territory. Can they address specific or new customer segments, given the current market demand and conditions? Lokesh Sikaria of Moneta Ventures says:

How companies are responding to COVID shows a lot of things about their leadership. It shows the ability to take action. Which customers are they targeting? Are they targeting industries that have been less impacted? If [their] main customers were fitness gyms and those gyms have closed right now, that's tremendous headwind versus serving utilities. The stock prices for utility companies haven't gone anywhere. They're still where they were. They're still spending the same amount of dollars. So what industry segments are important for us? How are companies able to pivot towards meeting the needs of those customers? We're looking for that messaging and the steps that the leadership took during this time will also become a key criteria for most VCs.

Angel investor, Sarah Imbach, is thinking of the COVID crisis as a shift from peacetime CEO to war time CEO:

What I'm personally looking for are the CEOs that are making those decisions, have those ruthless rubrics, getting incredibly focused on only what works, investing in only what is working, being willing to let go of things that they thought were going to be the right plan from before, but are clearly not [the right plan] in the current environment. It's very hard to let go of something that an entire leadership team thought was going to be the plan. The companies that successfully let go of the things that are clearly not going to work in the current environment, are going to be way ahead of the game instead of lingering through that process for a long period of time.

CEO and investor, Dan Goldsmith, reminded us that we have to look carefully at the planning for the short and long term:

I want to see how the strategic plan looks like for the company, that long term plan. Whether it stays intact and why, I want to see revised MBOs. I want to see the data that can support the plan and the MBOs. This is also a great pressure test on forecasting. I want to see revised forecasts. That's going to really put pressure both on the finance organizations and the leadership teams, and go to market teams as well.

Along with that, I want to see some scenario analysis. I think that we are an environment where things are changing month to month, week to week. So, I want to see some elasticity within leadership teams as well. Maybe [they] take some risks, place some bets, but [are] not arrogant or insecure [such] that they are not willing to course-correct and change things. I want to see various scenarios. I want to see pivots in that environment as well, all data supported. Then, the companies also need to start understanding and be able to look at outcomes and metrics in a shorter time frame. That will provide milestones along the way, which will ensure that they continue to make sensible decisions. From an additional metrics point of view, I look at expansion and retention of customers. That's a metric that we can't lose sight of and can't get away from [with] these teams, as well as retention of staff.

What to expect in the year ahead.  

Time to profitability is one consideration that was discussed by our investor roundtable. Is the company you’re evaluating prepared to weather 12 months without seeking new capital? Sarah Imbach mentioned she wouldn’t be looking at companies that need to raise money in the next 12 months:

I think there [are] always going to be great investors stepping up [and] investing in great companies. Having said that, [for] companies that are borderline [and] struggling a little bit, maybe the opportunities that they're sitting on aren't quite coming together. Depending on the stage and how proven out it is, it may be incredibly difficult to raise those funds in the right time frame. So, if you need the capital, that doesn't put you in as good of a position as someone who can make it through that much more time to prove out. I'd rather be in a company that has the time.

Lokesh pointed out that the uncertainty of the time frame for making decisions plays a factor:

No one knows whether [we] will return to 60 to 80% normalcy in three months or three years. The decisions you make, if you think it's not returning to normalcy in three years, [are] very different from the decisions you make if you think things are going to be just perfect in two weeks. I always like to ask out portfolio companies and even our partners, what's the timeframe that we are presuming this is going to last? So, you've got to anchor it on something and [adjust that timeframe] over time. For us currently, we think September is when it gets to be 60 to 80% normalcy. As more data comes in, as the world reacts, if we have to adjust that date, we will move that date.

The group agreed that looking at metrics and being data-driven are of particular importance right now. This can create some tough decisions when it comes to making the call on some portfolio companies. The bottom line is that this environment is like no other and we may be in for at least several more months of uncertainty, which makes it all the more important to look for data points to inform decisions while also strengthening your communications with companies and their customers.