Amie Patel
With half the world in “lockdown” mode, many investors are going to shy away from allocating capital, especially when there is so much uncertainty. On the flip side, we also see investors and other resource providers stepping up to become unexpected partners for the future.
Not everything that is faced can be changed, but nothing can be changed until it is faced.
James Baldwin
With half the world in “lockdown” mode, many investors are going to shy away from allocating capital, especially when there is so much uncertainty. On the flip side, we also see investors and other resource providers stepping up to become unexpected partners for the future.
As a team, we have gone through many macro-events (though nothing like the current one). Given the context of our portfolio’s customer base, as important as they may be, usual approaches to cut back on business cannot be the only narrative. Companies have to use the crisis to engage with their customers differently, enhance their operating thesis where possible, plan for survival (extremely difficult as none of us can predict timing) and prepare for a new growth trajectory. We know that economic recovery will return, and ultimately, spending power for essential goods and services will be a top priority.
This piece is based on our experience and highlights things to consider, as we all try to fill the capital (both equity and debt) gap.
Acknowledge the current reality
To state the obvious, finding readily available and easily accessible capital, is currently a challenge. Investors are facing an unprecedented time. In the early days of the crisis, many investors were reluctant to engage as they adjusted to a new operating norm. Many have spent the last few weeks getting organized and figuring out how to share thoughts internally, operate, and work remotely and are now trying to make sense of this new reality.
How long will this last? How deep will the impact be? What is the right play, given there is no playbook? How will economies re-start? Some investors are moving into a wait and watch mode and have put their pipeline on hold (indefinitely). Some investors have cash constraints and need to recalibrate based on capital availability and needs. Most are focusing on their current portfolio and some may focus on investment opportunities with lower valuations, given market realities. In short – it will take investors time to assess, re-evaluate, and reallocate.
Combined with this challenge are the daily decisions entrepreneurs will have to make to anticipate customer demand and behaviour, estimate the length of this episode, and wait for reallocation cycles to come back in favour.
Grab the narrative
In 2019, according to Preqin, private investors (which is inclusive of private equity and venture capital firms) had amassed $1.45 Tn in cash. This is the highest on record and more than double compared to five years ago. This dry powder will eventually need to come into the market, and the question is not whether it will be allocated, but how, when and into what industries. Essential goods and services – a place in which our entrepreneurs operate – will have a defensible position in the market, and this is an opportunity companies need to be ready to embrace.
As and when investors start to invest, most will lack critical information to make more difficult decisions. In that scenario, being able to share insights from the ground – the realities and the opportunity – will help to differentiate and elevate some businesses. Given market conditions, entrepreneurs must decisively own this narrative. Most long-term investors have the capabilities to commit and align, but there will be an increased focus on business models that have adapted (and can continue to adapt).
Entrepreneurs will need to focus on creating a narrative that defends how fresh capital will keep the business primed for growth or help to capture the immediate opportunity in the current environment.
Revisit and re-articulate unit economics
How do the unit economics change given the opportunity set during the crisis, and how will the company be prepared to capture the market when it opens up? All of these are important factors to position the company for long-term success, irrespective of size or stage.
What are the proactive steps to address the situation? The obvious often gets overlooked. What is getting done to take care of and address fixed costs? Essentially, what is the plausible path which will allow the business to survive the next 12 to 18 months? Assessment of risk is also critical to make an investment case. No one will know the risks the company faces more than its senior leadership team. Continue to press the organization to measure both imminent risk and project unexpected risk. Identify steps to mitigate them. Include this insight as part of the communication process with investors.
Creating the ability to think ahead with a game plan, and drawing distinct attention to your iterative analysis, can bring comfort to investors and further demonstrate your capabilities.
Look for aligned capital
Start to re-engage with supporters who know you well, trust you, and understand your business model. New investors will find it much harder to engage due to numerous factors – including limited ability to conduct due diligence given travel restrictions, lack of awareness, competing demands from their existing portfolio companies, and a preference to assess social issues that are closer to home.
Despite the shortage of capital, it will be necessary (to the extent possible) to remain vigilant concerning the right kind of capital. We have always believed that there are ‘good’ investors and ‘not so good’ investors. The latter favor these kinds of moments, as they leverage their negotiating power to focus on their own short-term gains. Often at the cost of the company’s long term success.
Assuming your business has been selective in its partners to date, it will continue to need the right partner for the future. Keep the focus on building partners capable of supporting you during the good times and the bad. Also consider alternative funding options (off-balance sheet growth, customer funding, partner funding, governmental support, grants) that can support your growth.
Leverage the moment for long-term benefit
Maintaining the ability to get back to full speed execution will also be a game-changer. It may be an opportune time to focus some energy on ensuring that processes are in place, the staff is aligned with company objectives and the entire team is geared up for when the gates reopen. As mentioned above, tap into your employees – and leverage the time to think about what has changed.
One example we can share was coming out of the microfinance crisis (which was right after the global financial crisis in 2008). One of our portfolio companies took the downtime to rehaul their entire technology platform and overall internal processes. When the market reopened, due to these critical changes, they were able to double their productivity. Leveraging the minds of employees is what may become the differentiator for the future. This is a collective effort and as much as staff is needed on the front lines, triaging operations and managing cash, businesses equally need a task force focusing on what needs to be done post COVID.
In conclusion
This crisis will require all entrepreneurs to dig deep within themselves and bring their best to the game. In the end, it will be about staying nimble. About commanding the narrative with optimism and confidence. And about choosing the right ecosystem of stakeholders to support them in this crucial time. We hope that all businesses that can manage this, especially those focused on delivering essential goods and services, will emerge stronger from here, even better positioned for long term growth.
