A RECKONING IS NEAR
March 13, 2020 / Source: SWO Angels
By: Dennis Ensing
While away on a recent vacation, I was unable to escape both the continuing story of the possible global impact of a COVID-19 pandemic and the increasing likelihood of an impending economic pullback.
Late in February, the NY Times published an article “As the Start-Up Boom Deflates, Tech Is Humbled.” On the beach, somewhere hot and isolated in the Caribbean, I read the article one morning, followed by a note that went out to Sequoia Capital’s founders and CEOs early in March – “Coronavirus: The Black Swan of 2020.” I then enjoyed a long walk in the sun and surf, but decided to write this post as I believe that a response is imperative within our members’ angel investment portfolio ventures.
The coming consequences of the convergence of these events requires you to consider some or all of these actions:
Ask your ventures for their 1 year monthly or biweekly cash flow forecast. Then ask: “Do you really have as much runway as you think? Could you withstand a few poor quarters if the economy sputters? Have you made contingency plans? Where could you trim expenses without fundamentally hurting the business? Ask these questions now to avoid potentially painful future consequences.
18-24 month view
Beyond the next 12 months, what impact could slowing revenue growth or increased expenses have on its forecasts? Now is not the time to look for hockey stick growth curves. Bore into forecast assumptions and repeat multiple sensitivity analyses to really understand vulnerabilities.
If the answers to the first question are less than ideal or your ventures’ cash runway is short, they should be shoring up and building reserves in earnest, considering all possible funding options – dilutive, non-dilutive, and debt.
Dilutive equity financing is becoming more expensive. It’s just supply and demand, plus risk as a big contributing factor. With constricted supply or capital and higher risks, beware of ventures continuing to position themselves on the high side of valuation ranges to preserve small measures of dilution when speed of closing and action might mean the difference between surviving – or not.
M&A – growth opportunity
Making fast and decisive adjustments to changing circumstances might also present opportunities to accelerate growth through consolidation. Strong ventures can make strategic and accretive acquisitions – adding customers, staff or new product lines to bolster plans.
If you wish to discuss any of this further in preparation for a conversation with a specific venture investment, please don’t hesitate to reach out to me.