To our Portfolio Companies, and Think + Community:
As you gather your resources and revise your strategy for the new world order, we recommend that you consider these three steps in your evaluation:
1. Manage cash flow. We don’t believe in V shape recovery for the economy, even if the stock market rebounds in that form. Funding in the VC area will further decline as we go through the next 12 months. You should assume it will be very difficult to raise money for the next 18–24 months.
The sooner and the deeper you cut your expenses, the healthier and faster recovery you will experience. It’s preferable to do one big cut rather than several small ones.
Plan your expenses so that you will have money for at 24 months, with the aim of raising in 18 months. We realize not every company can accomplish this, but we urge you to get as close to this as possible. To plan well, you have to do a good Scenario Analysis, comparing various possibilities and calculating their result (Frist Round Capital has a nice template for this).
It is always easier to rapidly expand hiring and expanses than to cut back, so in case we have a faster recovery, you will still be able to catch up.
2. Focus on profitability. We still don’t know what shape the economy will take in the next 2–5 years. Economists and analysts alike are in the dark since we haven’t had a situation like the current one where both supply and demand are suddenly disrupted, with unknown long-term consequences for growth.
As such, in general, profitability should take priority over growth. The healthy companies that can go back to the market and raise money will be the ones that have positive unit economics and margins and need money for growth. Investors will not penalize you if you show only modest growth in the next 12 months while you manage profitability and margins.
3. Plan for the new world order. We believe this pandemic will cause permanent and fundamental shifts in work and spending patterns, and in the economy in general. These changes will go far beyond working from home and video conferencing. Among the patterns to consider are three areas. First, in the near term be ready for longer sales cycles, difficult SMB market, and lower pricing demands from your customers.
Second, increasing automation and robotics will be in demand, as companies cut back on payroll and other expenses to match the lower demands. Third, long term trends will kick in that will benefit digital health care, next wave of video conferencing and collaboration, virtual services (e.g. video-based physical training), and flexible and rapid resource re-allocation: companies will be planning for next disaster with far more contingency plans they had considered before. This will be a big market opportunity.
We will outline in more detail the market and investment opportunities in the post COVID-19 world in a coming piece soon.
Stay safe and strong.