Revisiting my Covid 19 Letter to Portfolio Companies
I wrote this a year ago. I had a sincere hope I would be proven wrong. The glitz of sexy IPOs hides a ton of pain on the ground. While the slightest signs of recovery are being paraded, the amount of human suffering going unreported is unbelievable. And the Nifty is at all time highs. This dear reader, is what a bubble looks like (in my admittedly uninformed opinion).
Dear Founder,
We wanted to quickly share some of our thoughts on these uncertain times and pass on some of our observations on what to expect in the coming months. While calibrating the impact of CoViD 19 relative to other shocks in living memory is nearly impossible – it will likely have a more severe impact than 2001 and 2008.
It’s going to get a lot worse before it gets better:
For most of us, this is the third big downturn we have seen. What happened in the aftermath of 2001 is closer to what we are seeing today than 2008. In 2008 the cogs of the global economy were still turning – albeit slowly. People were still spending money. Going out to restaurants, gyms, local stores etc. Even at the worst point local commerce was happening. This CoViD-19 market shift is like ripping the band-aid off. We have gone from a white-hot economy to basically a recession overnight – this is far more reminiscent of 2001. We’ll be seeing a lot more of WebVans over the coming few months which will further suck the oxygen out of the larger ecosystem.
The current downturn will remain a fact of life for at least the next 24 months:
The severing of the global supply chain has already reverberated through the entire global economy. The virus threat will abate but we are witnessing an effective re-rating of global trade. Restarting the global factory will take a lot of time and effort. The drop in business activity will take at least 24 months to come back to Jan-2020 levels. Confidence erodes quickly, but comes back slowly. We believe even our 8 quarter estimate to be wildly optimistic.
No business will remain insulated from the externalities of this Pandemic:
One might argue that services / software businesses will be less impacted. However, the cycle of cash flowing through the economy will be broken at each point your services are used to deliver physical goods and services to consumers – and that will have a cascading effect. Some of you will see diminishing demand, some will see supply challenges. Now will be a good time to work on Plans B, C, D through Z to ensure business continuity. We’ll advise all our portfolio companies to throw out existing forecasts and plans for 2020 and plan for a much tighter capital environment and far less growth. Business metrics will cease to be strong indicators of future – so these (most importantly – marketing spends, growth expectations and spending plans) need to be titrated down and key insights gleaned from them. Your sales cycles are likely going to get severely stretched or even broken, especially if you have a large enterprise component. Plan for disruption and a lot more difficulty in converting your pipelines.
Cash is Oxygen:
Conserve it every way you can. This will mean likely taking some hard and painful decisions and postponing a lot of expenses – but this frugality is now a must-have. New funding rounds will become very hard to close. The cancellation of meetings / travel has already made it hard to develop trust / conviction on both sides of the table. Zoom is great, but only goes so far. Please review your capital plans very carefully. While the easy inference may be to put things on hold, there may be some of you for whom this may be a great expansion opportunity. Our limited advice here will be to be deliberate and act instead of reacting to situations. If you’re in the market raising funds – we’ll advise you to not over-negotiate. Again – cash in the bank is survival to fight another day. Picking what battles to fight will differentiate the winners from the could have-beens. Valuation gaps will hurt only if a business will still be around on the other side of this tunnel – it’s a high quality problem to have. If you have debt facilities, pull down on them now. They will dry up as this crisis plays out.
Decisive, Fast decision-making will be key to survival and even thriving:
DO NOT HESITATE. Yes, painfully wrong decisions may be made, but know that you will likely get just as many right. You have to be a war-time general now. Fear grips the world, but this is a unique opportunity to drive innovation. Sustainable unit economics and a clear path / plan to profitability are going to be keys to survival. So please make the right decisions to get these elements in place.