Show notes
We split this episode into two parts: in this, the second and final part (9B), we discuss the implications of COVID-19 in the Venture Capital and the Start-up ecosystems. We share our no-BS view on how easy/how difficult it will be to fundraise, depending on the space you are in, on what will likely change when the “new normal” comes into play and what to focus on in order to make your business survive this, the biggest and most ruthless of all storms (recorded on April 16th).
Navigation:
Introduction (01:27)
Section 1 - Impact on Venture Capital firms (01:44)
Section 2 - Impact on Start-ups (14:37)
Section 3 - Boards and Governance (31:02)
Conclusion (38:23)
Our co-hosts:
Bertrand Schmitt, Tech Entrepreneur, co-founder and Chairman at App Annie, @bschmitt
Nuno Goncalves Pedro, Investor, co-Founder and Managing Partner of Strive Capital, @ngpedro
Our show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news.
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Full transcription: may contain unintentionally confusing, inaccurate and/or amusing transcription errors
Intro (01:24)
Nuno: In this, the 2nd part of episode 9, episode 9B, we will be discussing the impact of COVID-19 on VC firms and startups. For further reference, listen to the first part of this episode, episode 9A. Let’s start today with Venture Capital firms.
Section 1 - Impact on Venture Capital firms (01:44)
I recently shared with a number of you, on Twitter and a couple of other social networks my own views on what's happening in venture capital. And let's start from the bottom up.
Let's start with the individual impact. I know it's shocking, but we, VCs are people, and therefore as people, we have the same issues as everyone else. When we go into shelter in place, we might have families that we need to take care of. We might have kids that we need to take care of, spouses, and we need to articulate complexities.
Like, for example, all of a sudden, if you have two kids, if you have a spouse that's also working, you might have three or four zoom sessions at the same time. And you know, houses are not of unlimited space. So obviously people need to articulate. I was seeing a social media post from a well known general partner saying that he was taking his calls in his car because that seemed to be the only real quiet space in his house.
So again, we as individuals are dealing with the same complexities as any other individual. And one needs to take that into account. What that implies is, there's a lag. You have a latency right now, if you're a company fundraising, you have to deal with this latency. The first step to that latency is what I just talked about.
It's the fact that I as an individual, as a venture capitalist, need to deal with this new reality and this new complexity. I might not be more productive immediately. It might take me a while to get back to my productivity.
The second level of latency that I have to deal with, if I again, am a startup fundraising, and trying to fundraise from a venture capital firm, is the fact that VC firms have portfolio companies, and portfolio companies in some cases right now are going through complex times.
And the way I normally categorize portfolio companies for a venture capital firm is you either have counter cyclical portfolio companies or cyclical portfolio companies. If they're cyclical, they're aligned with the current economic cycle we're in. If they're counter-cyclical, they're not.
If they're counter-cyclical at this stage, you're probably doing fine, your companies are probably doing well. If the companies are cyclical, your portfolio companies are normally either positively correlated or negatively correlated to the cycle, and if they're positively correlated meaning they're doing really well in the current cycle, we're in, basically you have issues like capacity. How do I hire faster? How do I scale? I'm having issues around regulation that I need to sort out, but normally it's about hyper growth. Many would say that's a great issue to have. Yes it is, but it also creates other issues in terms of capacity supply and how you, for example, as a board director of some of these startups need to deal with them.
Then there's the negatively correlated, the companies that are just getting killed. If you're in the travel space, if you're in the restaurant space, if you're in the hotel space. How are you dealing with this? And those companies need particular attention from, again, their investors at this stage. Some of them might have four months runway, five months runway. So how do you deal with that?
So again, that's how VC firms now are dealing with this. Those are the latencies that are subject to.
On the other side of latency, you have to take into account that many VC firms are raising money, or probably in the process of raising their next fund, or their first fund in some cases.
When this happened, those VC firms are going to have difficulty doing what we call a close of getting capital commitments from their own investors so that they can start investing in companies. Now, there are venture capital firms that are deploying capital, that are closing funds right now.
We just heard Lightspeed closed another record fund. And so those are deploying capital and are in the market. But again, they need to deal with their limited partner base. They need to deal with their own investors. And it might be the case that some of their own investors right now are having their difficulties.
It's not unheard of that family offices, that even some institutional investors in VC firms at some point in time have too much exposure and might have low liquidity. So if I'm a venture capital firm and I need cash to invest in a company, and I do what I call a capital call, it might be that some of my investors actually don't have that cash to give me, and that generates its own issues.
So when you're looking at VC impact, the VC impact comes at many levels, from the very individual person level, all the way to VCs' investors, all the way to the issues that they need to deal with their existing portfolio, et cetera.
So at this stage, VC impact is very significant coming out of COVID
Bertrand: Yes Nuno, I totally agree with all these points. I think it's good to provide that big picture view of what's happening on the VC side, and yes VCs are human beings as well, and they have to go through that, like you are on the other side, as an entrepreneur for instance. So it's key to understand, who you are working with, and what's their situation.
I think another piece to think about, both from a VC perspective and entrepreneur perspective, I've seen a lot of people comparing with 2008. 2008 , yes, that was a big crisis. So first after what we discussed, it's pretty clear 2008 is probably the best case, it's probably going to be worse.
But that's more than that. It's not just financial, this is a health crisis. People don't know, they might be dealing with their parents in very bad shape, that are at risk of getting this type of illness. They cannot meet, GPs cannot meet LPs, general partners cannot meet limited partners physically. Maybe you might close with people you know very well, but people you don't know very well, how are you going to even pitch them for your fund? 2008, it was not easy, but at least you could physically pitch, now you cannot physically pitch.
And the same is true with entrepreneurs with VCs. In the short term, I see a lot of VCs saying, " business open as usual." Yeah, but if you where not used as a VC to work remotely, I don't think you are open as business as usual. You are already changing everything how you operated, so some VCs are used to operate remotely, but they are rare. Nearly everybody else was not used to that, required in-person partner meeting, in-person meetings, and this is not there anymore. So business as usual, like some are claiming, I have a lot of trouble to believe, and by your description, it's pretty clear that it's a near mathematical impossibility.
Of course, some are closing deals because they knew each other for a while. Deals don't happen in a few weeks usually, you have met people before, so this kind of stuff is going to work out for the coming weeks, but at some point, we need to go to the next stage, which is, "Hey, we have not met, but we can still not meet physically face-to-face, how do we go from there?" and I think that will create change in process.
And to be clear, it's not just VCs and startups obviously, if you are in any sales situation, that's the same question. Some new etiquettes will be put in place, that yes, you can do some deals remotely, and it's okay, but right now, we don't know yet how some will adjust to that new reality, and that's part of your analysis as an entrepreneur, as a VC, on how to deal with that, and potentially delay some action.
I would personally strongly suggest to wait a bit before fundraising, and do everything to not need it, so that you can get a bit of sense of where the world is going, and how to position your business the right way.
Nuno: And as it is always the case in times of great volatility, there's also great opportunities, and so VCs that are aggressive, that have capital to deploy. That want to be aggressive going to the market, that want to build the brand, NFX actually just announced nine days or less to go from first conversation to commitment to start ups. Smaller checks, but still, that's an interesting thing.
This is a great time to be in the market. It's a great time to invest. It's a great time to have capital to deploy if you are a venture capital firm. A lot of companies that need capital right now or that are fundraising right now,...
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