Startup advice - Afrikan Heroes

Advice From Investors To Startups On Coping With The Coronavirus Crisis

April 25, 2020

Entrepreneurs beware: you’ll have to work extra hard and take extra painful decisions for your startup to survive the coronavirus crisis.

The warning comes from Elaia, a venture capital firm based in Paris, who like several European investors isn’t sugar-coating its message to entrepreneurs on the kinds of challenges the coronavirus pandemic poses for startups.

“Unless you are a biotech company working on a vaccine, your business will suffer. If you are operating in hotels, restaurants and catering, your business will suffer like hell,” Elaia told the companies in its portfolio, after the French were forced into confinement. “In any case, you’ll be affected by overwhelming market uncertainty.”

Investors are expecting their own day-to-day activities will be disturbed for over two months, a poll by fundraising advisory company Chausson Finance showed, based on answers from about 70 VCs. And “cash is king” is coming out on top from the advice they’re giving founders, poll results showed.

What other advice are investors giving? Here are seven pieces of wisdom for founders from seven different investors.

Tip number 1: Don’t just adjust, start over

You can’t just tweak your 2020 business and expenses forecasts. Given how deep the crisis is, you need to rethink them completely, says venture capital firm Elaia.

The French investor, which focuses on deeptech and digital startups across Europe, is advising founders to base their new sales estimates on the most pessimistic scenario imaginable, to avoid having to revise it down again in a couple of weeks.

Companies should stick to very cautious sales estimates until at least after the summer, when general economic activity might resume. Second-quarter sales should realistically be set to zero.

More from Elaia:

Words of wisdom and encouragement, sent to startups in the VC’s portfolio
A detailed coronavirus playbook for founders (in French)
Elaia’s Twitter feeds

Tip number 2: Plan your next round

Obviously fundraising isn’t going to get any easier as stock markets tank and investors may shy away from deals.

Still, though it may seem counterintuitive, the current situation actually means you should start planning your next round early, because it’s probably going to take longer to close, says Angular Ventures.

Start getting to know the right investors early and anticipate your next fundraising six to eight months ahead of time, instead of the usual four to six months before, the investor has been telling founders.

More from Angular Ventures:

A guide for early-stage enterprise tech companies, emailed to startups in its portfolio
Angular Ventures’ Twitter feed

Tip number 3: Rule of three

Axa Venture Partners is advising founders to think of coronavirus as a three-part crisis: first, confinement; second, when people are allowed to leave their homes again; and third, the mid to long run.

The investment fund, which is financed by insurer Axa and has backed 40 companies in sectors from cybersecurity to fintech, has started thematic Slack channels for its founders to exchange best practices. Their questions show entrepreneurs are mostly focused on the next 30 days of business, says Sébastien Loubry, a partner at Axa Venture Partners.

The impact of confinement measures should be treated separately and before everything else, with decisions on rent payments, temporary unemployment and pushing back hiring. But entrepreneurs should already have the second and third phases in mind as well; that includes questions about macroeconomic trends and changes in consumer habits, as well as the need for a deeper pivot in startups’ business models.

More from Axa Venture Partners:

Tip number 4: Keep churn to zero

Try and keep communication routes open with your customers throughout the crisis — it’s a critical part of keeping their trust and confidence, venture capital firm Serena Capital is telling founders.

Churn is going to be a huge challenge, especially for software as a service startups, as corporate customers weigh cost cuts and decide which suppliers to keep and which to scrap in the coming weeks.

That means this isn’t the time to cut back on your staff that handles customer relations, says Serena operating partner Amélie Faure. If you’re going to be customer-centric, it’s now or never, she says.

Be open to adapting contracts temporarily to your customer’s needs, or switching over to coronavirus-specific offers for the coming weeks. But don’t just renegotiate everything for free, Faure says — get something in return that doesn’t cost your customer anything, like a testimonial about your service for instance.

More from Serena Capital:

A crisis guide to communicating with customers
A note specifically on churn
Other blog posts for coronavirus times
Serena Capital’s Twitter feed

Tip number 5: Spread your cash to last you 18 months

French investor Kima Ventures polled its in-portfolio companies and found out they’ve got cash in the bank to last them about 12 months on average. Jean de La Rochebrochard, who runs Kima, says that’s a bit short.

“Try and spread that so it lasts you 18 months,” says Rochebrochard in a podcast for entrepreneurs he started last week. “You may have the best talent in the world, but the market always trumps that. Focus on cash for now.”

Rochebrochard predicts an improvement in economic conditions is unlikely before 18 months, and raising money is going to be tough until fall 2021. Founders should freeze expenses, call their bank and see what government support they can get, he says.

More from Rochebrochard and Kima:

Rochebrochard has been hosting a daily one-hour live broadcast since March 19, called Radio Château, taking questions from entrepreneurs
Rochebrochard’s Twitter feed

Tip number 6: Spot downturn opportunities

Sure we’re headed for a downturn, but “it won’t last forever though — it’ll be maybe a six to nine month thing,” says Tony Fadell, the iPod inventor and Nest Labs founder turned investor at Future Shape. Founders’ mindsets need to also reflect what will come beyond the turmoil to spot opportunities, he says.

“The best time to invest is in a downturn,” Fadell says. Startups that are usually battling for rare talent may find it’s the best time to lure golden profiles to them.

More broadly, technology that’s been there for a while and hasn’t been massively adopted may finally get a chance in this period. Things like teleconferencing and remote teaching.

“There’s always a silver lining. It’s an opportunity for startups, including for new projects to be created around what is happening right now.”

More from Fadell:

Tony Fadell’s Twitter feed

Tip number 7: Set rules for remote working

A policy setting the tone for how remote working will work at your company is a key part of any business continuity plan, LocalGlobe says.

In both cases, psychological well-being is coming out as the driving force for how to set up remote-working rules and habits.

First appeared on Sifted.eu

Charles Rapulu Udoh

Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer.

Coronavirus: The Black Swan of 2020 — A Letter By Investor Sequoia Capital To Founders

March 14, 2020

Here is a note that we sent to Sequoia founders and CEOs today to provide guidance on how to ensure the health of their business while dealing with potential business consequences of the spreading effects of the coronavirus.

Dear Founders & CEOs,

Coronavirus is the black swan of 2020. Some of you (and some of us) have already been personally impacted by the virus. We know the stress you are under and are here to help. With lives at risk, we hope that conditions improve as quickly as possible. In the interim, we should brace ourselves for turbulence and have a prepared mindset for the scenarios that may play out.

All of you have been inundated by suggestions for precautions to take around COVID-19 to protect the health and welfare of you, your employees, and your families. Like many, we have studied the available information and would be happy to share our point of view — please let us know if that is of interest. This note is about something else: ensuring the health of your business while dealing with potential business consequences of the spreading effects of the virus.

Unfortunately, because of Sequoia’s presence in many regions around the world, we are gaining first-hand knowledge of coronavirus’ effects on global business. As with all crises, there are some businesses that stand to benefit. However, many companies in frontline countries are facing challenges as a result of the virus outbreak, including:

Drop in business activity. Some companies have seen their growth rates drop sharply between December and February. Several companies that were on track are now at risk of missing their Q1–2020 plans as the effects of the virus ripple wider.
Supply chain disruptions. The unprecedented lockdown in China is directly impacting global supply chains. Hardware, direct-to-consumer, and retailing companies may need to find alternative suppliers. Pure software companies are less exposed to supply chain disruptions, but remain at risk due to cascading economic effects.
Curtailment of travel and canceled meetings. Many companies have banned all “non-essential” travel and some have banned all international travel. While travel companies are directly impacted, all companies that depend on in-person meetings to conduct sales, business development, or partnership discussions are being affected.

It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing. Some of you may experience softening demand; some of you may face supply challenges. While The Fed and other central banks can cut interest rates, monetary policy may prove a blunt tool in alleviating the economic ramifications of a global health crisis.

Read also: Would The Coronavirus Epidemic Affect Fund Raising For African Startups In 2020?

We suggest you question every assumption about your business, including:

Cash runway. Do you really have as much runway as you think? Could you withstand a few poor quarters if the economy sputters? Have you made contingency plans? Where could you trim expenses without fundamentally hurting the business? Ask these questions now to avoid potentially painful future consequences.
Fundraising. Private financings could soften significantly, as happened in 2001 and 2009. What would you do if fundraising on attractive terms proves difficult in 2020 and 2021? Could you turn a challenging situation into an opportunity to set yourself up for enduring success? Many of the most iconic companies were forged and shaped during difficult times. We partnered with Cisco shortly after Black Monday in 1987. Google and PayPal soldiered through the aftermath of the dot-com bust. More recently, Airbnb, Square, and Stripe were founded in the midst of the Global Financial Crisis. Constraints focus the mind and provide fertile ground for creativity.
Sales forecasts. Even if you don’t see any direct or immediate exposure for your company, anticipate that your customers may revise their spending habits. Deals that seemed certain may not close. The key is to not be caught flat-footed.
Marketing. With softening sales, you might find that your customer lifetime values have declined, in turn suggesting the need to rein in customer acquisition spending to maintain consistent returns on marketing spending. With greater economic and fundraising uncertainty, you might even want to consider raising the bar on ROI for marketing spend.
Headcount. Given all of the above stress points on your finances, this might be a time to evaluate critically whether you can do more with less and raise productivity.
Capital spending. Until you have charted a course to financial independence, examine whether your capital spending plans are sensible in a more uncertain environment. Perhaps there is no reason to change plans and, for all you know, changing circumstances may even present opportunities to accelerate. But these are decisions that should be deliberate.

Having weathered every business downturn for nearly fifty years, we’ve learned an important lesson — nobody ever regrets making fast and decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses. In some ways, business mirrors biology. As Darwin surmised, those who survive “are not the strongest or the most intelligent, but the most adaptable to change.”

A distinctive feature of enduring companies is the way their leaders react to moments like these. Your employees are all aware of COVID-19 and are wondering how you will react and what it means for them. False optimism can easily lead you astray and prevent you from making contingency plans or taking bold action. Avoid this trap by being clinically realistic and acting decisively as circumstances change. Demonstrate the leadership your team needs during this stressful time.

Here is some perspective from our partner Alfred Lin, who lived through another black swan moment as an operating executive:

“I was serving as the COO/CFO of Zappos when I was summoned to Sequoia’s office for the infamous R.I.P. Good Times presentation in 2008, prior to the financial crisis. We didn’t know then, just like we don’t know now, how long or how sharp or shallow of a downturn we will face. What I can confirm is that the presentation made our team and our business stronger. Zappos emerged from the financial crisis ready to seize on opportunities after our competitors had been battered and bruised.”

Stay healthy, keep your company healthy, and put a dent in the world.

Best,

Team Sequoia

Charles Rapulu Udoh

Honest Advice for First-Time Startup Investors From a Long-Time Investor

March 8, 2020

Dear first-time angel investor,

It’s wonderful you’re considering an investment in a startup! As a VC who might invest after you, I’d like to share thoughts that may help — especially if you’re in a newer startup market where there are fewer experienced angel investors to offer guidance.

You’ve succeeded in other walks of life, so you might read this and think, “Who is he to tell me what to do?” I’ll make my best case — feel free to ignore me!

1. Embrace the downside

Fact: You will probably lose your money in this company. In almost every case, no amount of “structuring” or “risk mitigation” can protect you. The mythical profitable business that still needs your money and can also grow to enormous size is… rare. This startup you’re considering investing in probably isn’t it.

Naive angels worry about salvaging money from their losing investments — that is, “fixing the dogs.” It’s a fool’s errand (though supporting a founder emotionally during tough times is important). Experienced angels worry about keeping the upside by investing at a reasonable valuation so the winners actually make up for the losers.

2. Diversify

We only know one way to reduce your risk: take many bets. You probably need to invest in ~10 companies before you feel like you are getting a handle on things, and ~20 before you have good odds of earning a return.

3. Resist the urge to get cute with the deal terms

Yes, a shopping mall might thrive because an investor inserted a thoughtful covenant with the lender. Investments with known business models and predictable markets are just different than startups, which are defined by their search for a lasting business model.

Specifically avoid guaranteed returns (other than protecting your capital with the standard 1x liquidation preference), milestone-based valuations (complicated and perverse incentives!), extra control provisions (like a veto right on a sale when you are investing $10,000), options on the next round (other than the standard pro-rata), pre-negotiated sales before everyone gets liquid.

Quirky terms rarely survive, anyway. Later investors force their removal as a condition of investment. Sometimes, these terms even kill a startup because the cap table is too hairy for a good investor to wrestle with it. In startups, even more so than in life generally, simplicity wins, complexity kills, and the road to dissolution is paved with good intentions.

If you want a “deal” (that is, especially good terms), just be transparent and argue that you deserve it. Offer a lower valuation or valuation cap. If another investor will invest at a $3 million valuation and you will only invest at $2 million, tell the founder why you are worth more dilution.

4. Pay a market price (and avoid overpaying)

Know the market price for startups at different stages. Experienced angels know that by overpricing the initial valuation they actually may hurt the company — by hindering future fundraising. Down rounds can ruin businesses.

5. Control your urge to be in control

Startups with less investor control seem to outperform those with more. Startup investments run on trust. If you trust the founder, there are few areas where you’ll need special terms in the documents. If you don’t trust the founders, no special terms can save you.

6. Use standard startup documents

There are many standard forms you can use — like Series Seed if you want equity, or SAFEs if you want something else. These are tried and tested, and the only successful modifications we see come from experienced startup investors. Our fund even published the documents we use — including an explanation of the major terms.

If you are using convertible notes, find an experienced startup investor that has a standard note document without any unusual terms and copy their note.

7. Get the startup an experienced startup lawyer

Yes, you have your trusted firm with which you’ve done dozens of deals, and they have “startup” experience because they’ve incorporated new companies and negotiated private investments. And you trust your sister-in-law with your will and real estate. But startups are different. If you were arrested on a DUI, would you call your brother the tax lawyer to represent you? Use an expert — it matters.

The company’s lawyer must also be independent. We’ve seen cases where an angel thinks they’re doing a company a favor by setting them up with the investor’s lawyer. “We’re all friendly.” Good startups develop the habit of taking their own counsel.

8. Be fast and light

Know if you are willing to be the first investor, or if you want safety in numbers, and be clear about which you are willing to do. You can create damaging ambiguity hanging around the hoop.

Match your diligence to the size of your check and the stage of the business. Asking a day-zero company for five-year financials is a waste of their time and will provide no real information for you. Most experienced angels decide on investments of up to $100,000 in a meeting or two at most (though they often do substantial work calling references or validating assumptions with customers, etc.).

If you do too much diligence, you’ll end up with lemons. Good companies eventually have options. If you spend six months kicking the tires for a $10,000 investment, the startups who wait around for your company-proctology are more likely to be duds.

After you invest, asking the founder to report to you too frequently will only tax your own chances of success — “you can’t grow the pig by weighing it every day.” Imagine if every investor who had less than 5% of a business wanted a weekly update in person. (And, founders, if you want investors to be ready to help you and to stay off your back, then it’s on you to provide them regular updates — monthly is the default though quarterly is fine as long as you include real data about the important metrics.)

9. If you want the founder to respect your experience, you need to respect the limits to how widely your experience applies

Copy editing the founder’s website as a condition of making an investment is… probably a bad idea.

Maybe some of your experience bootstrapping a small manufacturing company in the early 1980s is relevant to an A.I. company in 2018 — most is probably stale. Business experience gets old like milk, not aged like wine. Explaining to employees that you’re going to miss payroll: relevant. Pontificating on which apps you think twentysomethings want: less so.

10. Your time is valuable, too

Think like a medic on the battlefield: triage. Spending half your week on the company that’s not going anywhere is a bad use of your time. Ironically, helping portfolio companies is time-efficient if you control your instincts — founders are the busiest professionals alive! The five minutes you spend crafting one email for your best company to get an intro to one big customer — that’s the stuff that matters.

I’ve seen the movie of startup investing more than 100 times and I believe these principles are in your best interest. The best-performing startups tend to have angels who are experienced and easy. In fact, those angels (especially those who founded startups themselves) are often the most valuable investors on the cap table (even more than, capitalism forbid, us “professional” VCs).

If you want to see and get into the best startups, recognize that this deal probably isn’t it — and your reputation with founders will shape how many deals you see and win in the future.

So treat the founders right, and we’ll all do better together.

Best,
A seed VC

Roy Bahat is the Head of Bloomberg Beta, investing in the best startups creating the future of work.