Dear CEOs – Information Venture Partners
**The letter below was sent by the Information Venture Partners team to its portfolio company CEOs**
March 16, 2020
These are interesting and unprecedented times. We all know about COVID-19, and all of you have or are taking appropriate steps to deal with your employees and other stakeholders. We are profoundly proud about the way you have responded to the situation. As we move to this virtual/remote work environment, we remind you to embrace community. Please help your neighbours, take care of your families and listen to the public health experts, because like vaccinations, it only works when we all do it. As importantly, please listen to your employees and their concerns, many have never been through an economic contraction (more on this), and most have never been through a pandemic (arguably SARS is not the same, if so, none of us have been through this). Communicate with your employees, there is no such thing as over communication. Listen closely, we are working with our portfolio company Thoughtexchange to give you all a free Te COVID-19 instance to get their perspectives (link here). Thank you Dave from Te.
We are also available to connect you to each other. We have spoken to most of you about your plans including the duration of the remote work, and your plan to manage a virtual organization. But if you wish to speak to other CEOs, we can help. And as you know, we are absolutely available 24/7 for anything you need.
While the current focus in the news and in our day-to-day life is the pandemic, the greater purpose of this letter is to share with you our experiences as the economy adjusts to the changing conditions. There is no doubt that we will be talking about the “R” word (recession) very soon. There is no chance that the actions that will be needed to contain the virus will not have a dramatic impact on the economy. We will fall into a recession. We have seen the beginnings of the adjustment in the public markets. What is incredible about the recent correction is that the market has adjusted BEFORE the negative economic news. It is pricing in expectations of an economic shock. As of two weeks ago, everything reflected the expectations of continued growth and healthy valuations. The markets have adjusted the valuation metrics to reflect more historical norms, but not yet the impact on revenue, cash flow or profitability (metrics). Looking at the impact this has had on manufacturers, and the travel and hospitality industries already, and soon on retailers and other sectors, it will happen. China cannot pull us out of the recession, only a strong US or holistic global economy can.
As private companies, we are all impacted by these new levels, and we have begun to see some of this evidence. We all need to evaluate our current fiscal health. We need to ensure that we have at least 18 months of cash on hand, and if not, we need to plan (quickly) to evaluate the alternatives. Please be clear, 18 months is the minimum level of preparedness. We should also consider partially drawing on credit facilities before they dry up, like they did in 2008.
Cost containment will be an alternative to consider. Unfortunately, this includes job cuts, or salary cuts in lieu, or both. Obviously, all expenses need to be considered and some, like events and travel will come naturally.
We have not yet seen changes in the behaviour of our customers. However, we can assume that they will be impacted and that it will not be business as usual. Our experience has been simple. During periods of uncertainty, large organizations freeze all spending. It is indiscriminate. It is sudden. Everything but the greatest of emergency spend is frozen. Organizations do not care that you are one signature away, it is the only way they can control spend, while they themselves come up with plans to address the new reality. Only then do they re-evaluate all projects, usually on the basis of need, not ROI.
Mid-size businesses are much more able to react to the circumstances of the projects individually. This does not mean that they are not impacted, just that they deal with decisions differently, more independently.
Expect small businesses to be most impacted by change in cash flow and have the highest failure rates. Companies that are dependent on venture financing will also suffer. They, like you, have gotten to where they are based on the backing of investors, and once that dries up, and they have not adjusted to be cash flow breakeven, the probability of failure increases dramatically. Unfortunately, venture capitalists move in herds. As soon as a few VCs start pulling termsheets, renegotiating terms/valuations or just stop investing, it becomes a contagion of its own. Either way, the balance of power has shifted from entrepreneurs to investors. As a result, valuations will adjust very quickly. If you were preparing for a round at 10X FTM’s revenue, expect it to move back to 5X LTM revenue (or some other similar scale adjustment). This adjustment will take 6-12 months. Alternatively, investors will sit on their hands (even as billions of dollars sit idle) and do nothing. You have done nothing wrong, you just have had the misfortune of mistiming your fundraise.
As mentioned before, we need to get everyone to a good spot to weather the storm. Please run different scenarios that dramatically defers buying decisions for the next 3 quarters, i.e. for the remainder of the year. Our guidance would be a 50% reduction starting in Q2. We would like to review these with you, and the board at large. Many of you have already embarked on scenario analyses. Let’s run this one and understand our cash situation. We need this analysis as inputs into our own analysis to determine how to best allocate reserves to support the portfolio.
If you have not embraced digital marketing, you will need to. It will be difficult to find people at their desks when many are working remotely, cold calling will be difficult. Forget about events for several months or quarters. During a decision freeze, things will stall. During a recession, people may lose their jobs. Use this time to expand your network within your prospects. More champions give us a better chance of winning.
If you have messages that can be adopted for COVID-19 or for the recession, start preparing them. Most of us have a message we can try. This may be our best lead gen tactic. Do not take obvious advantage of the situation. There will be backlash against those that are exploiting the situation. Our points around community from above, apply to business as well. Enterprises will remember those that were there to help and support as best as they could.
Even as we share all of this, please do not panic. We have been through similar before, as have many of you. Your actions as leaders will be mimicked by your employees. Good stewardship and grace under pressure will go a long way.
All this will pass. It always does. We just don’t know how long or deep the correction will be. If there are words of encouragement, remember there are always great companies that are built in these periods. You can be one of them. We are confident that collectively we can navigate the rough seas.
Many thanks for your leadership.
Your Information Venture Partners team.