Author: Martin Trust Center

by Kosta Ligris, Trust Center Entrepreneur in Residence

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…”

The opening of Charles Dickens’ novel, “A Tale of Two Cities,” contrasts well with the world we are living in today. Whether we are looking at what the world looked like only a couple of months ago compared to today, or what is going on in our hearts and minds as we witness a truly trying time in history, Dickens’ words highlight the paradox we are experiencing right now.

Just weeks ago, we were riding historical highs in the stock market and seeing unprecedented company valuations. We saw, for the first time, a fintech company acquire a bank, as Lending Club announced the purchase of Radius Bank.  Visa decided to get in the game as well, spending $5.3 billion to purchase the fintech company, Plaid. But in the blink of an eye, we are watching businesses struggle to chart a plan for survival.

Most of us have read Sequoia’s Coronavirus: The Black Swan of 2020. Any good leadership team will go through the checklists of all points referenced. I would argue that this behavior of monitoring and assessing cash flow, headcount, fundraising, runway, and spending should be standard operating procedure during the best of times, not just the worst of times.

There is no question that being able to adapt and pivot is a requisite skill for any leader. These challenging times define us as leaders and entrepreneurs.  It takes a special type of crazy to be a founder. We take risks and we challenge the status quo, but being able to process information and adapt quickly is even more important during a period of great uncertainty and instability.

Founders are asking me about fundraising during this turbulent period. They don’t know what to expect, and many of them are even nervous to approach angels or venture capital firms. They ask if it is a bad time to pitch and whether they should wait. They start questioning if they should launch and hire. There are so many considerations and complex questions; a leader needs to communicate a vision clearly, even if that vision has changed over the course of the last few weeks. I’ve written about the importance of storytelling. Now, more than ever, you need to be able to articulate your plan and get the team focused and aligned.

Attorney William “Bill” Schnoor of Goodwin has seen some of the “worst of times,” having worked with companies during the dotcom bust and the last financial crisis. Bill says, “You must have a laser-focus on cash and cash management. You need to make your base case as a worst-case scenario. No further capital is coming into the company, how do you extend your runway?”

Not a fun model to run, but one that is entirely necessary in your financial analysis. With respect to fundraising, Bill notes, “Across all venture and private equity there was a lot of dry powder. So, there is capital out there, it is just going to be much harder to access.” Interestingly enough, Bill shares that times like these create a new moat from competitors as this difficulty in securing capital will keep some competitors out of the market.

Jumping on Twitter, you see countless VC’s claiming they are open for business and looking for the next great company from amazing founders. But what is the reality?

David Beisel, cofounder at NextView Ventures in Boston, says,

“In theory, most institutional venture capitalists are still open for business to fund new ventures. Given the record amounts of their own fundraising over the past couple years, and the recognition that historically challenged times can spawn the most formidable startups, many VCs are publicly loud about looking at new opportunities. In practice, however, venture capitalists are prioritizing spending meaningful time with their own existing portfolios to ensure that they can best weather the crisis.”

Richard DUlude, cofounder of Underscore VC in Boston, adds,

“Even if we intend to keep our pace of investing the same through the period, the number of startups vying for that same capital at the same time has gone up with all the uncertainty, making the bar higher for any new investment we’re looking to take on. That said, rest assured that some of the most interesting companies each generation come out of tough periods like this. Why? Because it emphasizes getting the fundamentals of the business right from the beginning, which sets a strong basis for success to be capitalized and accelerated upon in more buoyant times.”

Hannah Arnold, of F-PRIME CAPITAL in Cambridge, adds,

“Our portfolio is our number one focus now as it always is, but great companies have been made out of recessions and we are continuing to look for new investments.”

Frankly, I tell my students and founders: Would you really want to have an investor that is not putting their portfolio companies first during this crisis? You want partners that are not just there for the good times. Great partners and investors are there to make sense of the challenges and struggles with you.

At the Trust Center we talk a lot about the importance of being antifragile. Bill Aulet, our managing director, writes in BizEd “to deal with future challenges, we will need people who don’t just survive in a chaotic, stressful, and complex world, but thrive.”

We push our founders and entrepreneurs to embrace risk and not be afraid of failure. What is failure but an opportunity to learn? Thomas Edison said, “I have not failed, I’ve just found 10,000 ways that won’t work.” That is the type of Darwin-like adaptation that Sequoia is referencing. How do you take all of the challenges you are faced with today and find ways to adapt and create value? It is not easy, and many will not survive, but for those that do, this experience will make them stronger and define them as leaders.

General Catalyst writes that the role of a leader is to “define reality and give hope;” a principle they claim has guided partner Ken Chenault’s career. People are well aware of the impact COVID-19 is having on companies and our world. Defining what reality looks like is key. Your people, your investors, and your customers need to see that you understand and appreciate our new reality.

Be honest, be transparent, and be authentic. No matter how frightening this new reality may look like for your business, a leader needs to be able to chart a course for realistic success guided by their core values and an infectious passion that motivates the team to embrace hope for a better future.

So what is the new reality? Here are my takeaways, which have been validated by the investors, lawyers, and founders I have been speaking to over the last two weeks:

  • Look for ways to create new value and revenue during this environment.
  • Be hyperfocused on burn rate, runway, balance sheets, and revenue models.
  • Capital exists but the terms and valuations are being recalibrated given the current climate.
  • Investor priorities have shifted to focusing on their portfolio companies and working closely with them. If you have investors already, work closely with them.
  • Be honest with yourself, with your team, and with your investors.
  • You may have to make sacrifices and tough decisions.
  • Reach out and engage investors, but be sensitive and respectful of timing and priorities.
  • This too shall pass. With any major shift, the initial period is the toughest. Stakeholders need to assess and get their bearings.
  • Focus on yourself and your people – if you are not communicating, that too is a message.

Reality also requires you to concede that you are human. Don’t be afraid to be vulnerable with your people.  They will support you and help execute on the plan. People build companies and people are mortal; we are scared, we laugh, and we need support and validation from others. This is the worst of times for many, not having lived through previous volatility and fear. For those that are able to adapt and focus, this can be the best of times. Exciting innovation will come from the lessons we learn during this frightening time in our lives.

Entrepreneurship is even more vital during times like this: learn, adapt, reflect, and connect with those around you. These are skills that will empower you to take control of a problem, an industry, and your future. It may feel like the season of darkness and winter of despair, but I promise you that the season of light and spring of hope is just around the corner.