- Amid the coronavirus outbreak, investors are telling startup founders to look closely at sales forecasts, hiring plans, expenses and every other assumption about their business.
- Turmoil can also present opportunity, as changing markets and circumstances create new challenges to solve and opportunities for startups to grow their businesses.
- Difficult times bring out the true character of company leaders. Be human, but do your best to keep a level head under pressure.
When the global financial crisis hit more than a decade ago, Zillow was a burgeoning startup with 150 employees and little revenue.
“It was a tough time,” recalled Rich Barton, co-founder of the online real estate giant. “But we made it through strong.”
Barton, who returned as CEO of the $9 billion company last year, knows what it’s like to lead a startup through economic turmoil.
Coronavirus Live Updates: The latest COVID-19 developments in Seattle and the world of tech
It’s a situation company leaders must face again as the COVID-19 outbreak that has infected more than 113,000 globally creates uncertainty about the business climate. Fears over the outbreak and an oil price war led to the worst day for U.S. stocks since 2008 on Monday. President Trump has already discussed a payroll tax cut.
“The biggest challenge is that the current situation is extremely fluid and very different scenarios are almost equally possible,” said Boris Wertz, general partner at Version One Ventures. “So everyone should just prepare for the worst and diligently watch the situation.”
Silicon Valley venture capital firm Sequoia Capital last week published the letter it sent to portfolio founders and CEOs titled “Coronavirus: The Black Swan of 2020.” The investment group told its entrepreneurs to “question every assumption about your business” related to cash, fundraising, sales forecasts, marketing, headcount, and capital spending.
Barton, who previously co-founded Expedia and Glassdoor and is a board director at Netflix, echoed the advice.
“Raise cash when you don’t need it,” he said. “If it’s too late to be prepared, raise cash anyway. If you don’t like the price, learn to like it.”
He said CEOs should slash expenses where necessary. Beyond the balance sheet, company leaders must also think hard about their behavior and messaging to employees.
“The character of the founders and their companies is on full display when hard decisions are being made,” Barton said. “Be human and respectful.”
Seattle-based Madrona Venture Group is in close contact with its portfolio management teams, sharing best practices and providing advice.
Tim Porter, managing director, said the overall guidance is to not panic, but to be ready if this downturn lasts for an extended period of time. He said companies should re-examine hiring plans, think about how sales and marketing changes in a work-from-home environment, and consider cash reserves.
“While some businesses will be impacted more or less than others, we expect Q2 to be soft and likely also Q3,” Porter said.
A Singapore-based VC firm told a startup I’m working with that they’re not going to wire the entire $2m investment they committed to in the Series A, which has been in closing the last few weeks. The rationale was to conserve capital due to coronavirus. The funding risk is real.
— Tommy Leep (@leepnet) March 4, 2020
Some investors will be more skittish about plowing millions of dollars into companies, at least for the time being.
Valuations may take a hit as a result, and the record amounts of capital invested — funding to Seattle-area startups reached $3.5 billion last year — could take a cut.
Chris Devore, general partner at Founders’ Co-op in Seattle, said there was already considerable uncertainty due to the presidential election. “This only compounds what was already expected to be an anxious year,” he said.
But a potential recession also provides opportunity. Companies such as Airbnb, Square, and Stripe all launched during the global financial crisis.
“While there is no question that fundraising for an early stage startup might be harder in these market conditions, we also believe that great companies are built during difficult market environments,” said Diane Fraiman, managing director at Voyager Capital. “The teams that know how to stay focused on executing on the product and customer priorities win in the long run when the markets turn around.”
And some investors aren’t spooked — in fact, just the opposite.
True entrepreneurs can seize the day now.
All the startup tourists have started going home… And it’s only been a few weeks of turbulence. We are as eager as ever to be investing in true entrepreneurs!
— Niko Bonatsos (@bonatsos) March 9, 2020
Greg Gottesman, managing director at Pioneer Square Labs, helped startups work through two global economic crises during his tenure at Madrona Venture Group. He said this situation is different.
“There aren’t fundamental structural issues in regard to the economy that’s driving this period of uncertainty,” he said.
Even though Seattle has become the first epicenter for the U.S. coronavirus outbreak, Gottesman said he still considers the region the most exciting tech market in the country.
“This will be tough for us,” he said. “But we’re going to get through this situation ahead of other folks. All the underlying fundamentals for what makes Seattle so incredibly compelling as a tech center will remain.”