As the battle against COVID-19 rages on in our hospitals and communities, startups have been faced with increasingly tough decisions as they navigate through its social and economic consequences.
In a virtual town hall meeting this week, partners at our VC firm met with portfolio company CEO’s to discuss the future of funding, the importance of cost structure, and potential opportunities in these uncertain times.
Here, we’d like to share the main takeaways with the broader startup community, where many companies may be facing similar trials.
Many VC firms in our network have been slowing down in terms of new investment, while strategically reserving funds to further deploy in existing portfolio companies. Some are “window shopping” — looking but not investing — for the next few months. The lack of in-person meetings adds insult to injury, as getting to know the team is often a key step to closing a deal.
Of course, some VC’s are still active — our team, for example, closed two seed stage deals in March. But even the remaining investors are becoming more selective, with a higher bar for a startup’s traction and financial performance. We also expect to see some downward adjustments in valuation.
In the end, there are always exceptions (especially when things go topsy turvy), but it may be wise to ask prospective investors to share their current stance.
Look into debt financing options. The founders at our town hall discussion shared positive experiences obtaining credit lines through Bank of America, Citibank, and WTI. For those with existing loans, some banks are offering more lenient terms such as delayed interest payments. Overall, now is a good chance for startups to further develop their relationship with their bank.
Seek loans and tax benefits through the CARES Act* and other government aid programs.
Summary below:
1.IRS Employee Retention Credit
What: A tax credit worth “50% of up to $10,000 in wages” for qualifying companies (see here for details).
How: “Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.” In certain cases, employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
2.SBA Economic Injury Disaster Loan (EIDL)
What: Loans of up to $2M, with a $10,000 advance paid within 3 days of a successful application
How: Apply and submit materials on the linked website.
3.CARES Act Paycheck Protection Program
What: Forgivable loans to small businesses to cover expenses like payroll, rent, and utilities (detailed FAQ here)
How: Starting April 3, 2020, “Apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Visit www.sba.gov for a list of SBA lenders.”
Some implementation details of the CARES Act are still in flux, so we encourage companies to work closely with their legal teams in addition to their bankers, to gain a more holistic understanding on the developing policy. For very young startups, now may also be a good time to build a relationship with external legal counsel.
Finally, as the legislation currently stands, some VC-backed firms may be excluded from CARES aid, but the National Venture Capital Association (NVCA) is pushing lawmakers for more inclusion of VC-backed companies.
In our view, “growth at any cost” is an increasingly outdated concept, the perils of which have been clearly demonstrated by the Wework debacle. In fact, many VC firms are now working to clean up the balance sheets of their portfolio companies and reform lax attitudes towards profitability. The current crisis will likely accelerate this trend.
So, companies that are not yet cash flow positive should re-evaluate their cost structure, or else it may be difficult to raise money in the near future. CEO’s can try this simple exercise: wipe out your entire top line and see how much runway is left. Can you survive 18–24 months, in the worst case scenario, before another round of funding? If not, consider cutting costs.
Derek Wang, founder of business analytics startup Stratifyd, offers the following advice for CEO’s facing the difficult task of shrinking their employee base:
“Be respectful but decisive. Avoid ‘peanut butter’ layoffs. In other words, don’t spread things out across many months. Then, make sure to send the right message to the employees you keep. Provide them with transparency and clarity as soon as possible. This is key to preserving morale.”
Jack Jia, a seasoned VC investor who also runs healthcare startup Musely, shared his own company’s response to the current situation:
“Being in the telemedicine space, we’ve seen recent revenue increases of 3–4x. But we’re still making contingency plans. At some point, people will spend less because their incomes are dropping. We’re flattening our own growth curve, because it’s easier to ramp up than it is to ramp back down.”
The current situation is a test of a founder’s creativity and adaptability. Many are finding ways for their company’s expertise to serve urgent needs in the public health response. Others are adjusting their business model to better support their customers, for example, by offering development partnerships with low upfront cost to both sides. For those lucky companies with excess liquidity in the bank, high churn in the market may give rise to hiring and M&A opportunities. Finally, as paradoxical as it may seem in the era of social distancing, now is the time to invest in relationships, with your employees, your customers, and your communities.
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