Cofounders Capital Advice to Portfolio Management Teams

David Gardner, Founder and Managing Partner of Cofounders Capital

Editor’s Note – David Gardner shares a note to portfolio companies with gudiance to navigate the impact of COVID-19.

Founders and CEO’s:

I hope that each of you and your families are healthy and safe during this difficult time. We have spoken with most of you and I know you are all facing difficult and high-risk decisions this week. We thought it might be helpful to provide you with some guidance and suggestions as you face these current unprecedented challenges. We draw these suggestions from our own experiences running early-stage companies during economic hard times and from the advice of other fund managers, our venture partners and advisors.   Keep in mind that although several of us have had to lead our companies through economic downturns, none of us have experienced one combined with a worldwide pandemic. In many ways you are navigating uncharted waters. Every industry and business is unique, so some of these recommendations may not apply to your situation. We welcome your calls anytime to discuss your specific situation in more detail.

1. Don’t give up on sales
Just because your prospective customers may be working from home does not mean that all sales have stopped. We have heard some of our CEO’s say that they have found decision-makers surprisingly available, even though their offices have been closed, with time on their hands to consider cost-saving technologies.

2. Adjust our marketing spend
We are hearing early feedback that CAC is going up so the natural reaction might be to cut marketing spend, which might be the right call but not necessarily. Even as sales are slowing, we are hearing from several of our companies that initial contacts with new prospects are up as decision makers find themselves with time to return calls, catch up on emails and research cost-saving solutions. Filling the top of the funnel may not be as gratifying as seeing revenue dollars but this will be important to have as things start to pick up again. Your sales team may have good excuses for missing quota this month but these are not good reasons for failing to hit activity metrics which should remain at-plan.

3. Right size your organization
Every CEO’s first mandate is to never run out of money. This is especially challenging for early-stage SaaS-based ventures that tend to grow their monthly recurring revenues slowly rather than getting big up-front payments. We have worked with each of you to develop your models and forecasting process. If you predict falling sales and elongated sales cycles then it behooves you to adjust your spending and make whatever cuts are necessary. These are especially tough decisions because at present forecasting is very difficult. I’m not sure I have confidence in any of the updated bookings forecasts I’m seeing this week. Some of our companies are modeling 25% of planned new sales this quarter and 50% to 75% next quarter. A few companies are modeling no reduction in sales at all. Regardless, most of you are downgrading your forecast to some degree and your organization will need to downsize expenses proportionately. Be true to the data you are collecting and try to make decisions independent of traditional startup optimism and emotion. If your ship sinks, everyone will be out of a job, so choose the lesser evil and save those you can. Right your ship, navigate ahead and then you will be alive to rehire in the future.

4. Err on the side of cutting projects and retaining your best human assets
It is difficult to stop funding major projects into which you have already sunk a lot of investment dollars. But you now live in a world where cash is king again. Don’t think about the money that has already been spent but rather on how the money saved moving forward is going to help you retain your must-have best people. While you are right-sizing your enterprise, keep in mind that development projects and initiatives are much easier to restart when things turn around than it is to recruit, vet and train top talent.

5. Be transparent with your stakeholders
Don’t sugarcoat things when communicating with your investors, customers or employees. They will appreciate your honesty and need to believe that you are giving it to them straight. The only thing scarier than the thought of losing your job or money is the nagging thought that it’s probably much worse than you are being told. Our ability to help you is severely limited if we are getting overoptimistic reports and forecasts. Err on the side of over communicating in a crisis. Where there is a lack of communications it is human nature to always assume the worst. Your stakeholders know that this is a difficult time. Everyone needs to know that you are in charge, you have a plan and that you can make the hard calls necessary to navigate this.

6. Be decisive; hope is not a strategy
It is a natural tendency to put off making difficult choices in the hope that things will change before you have to make the hard choices. This procrastination has been the ruin of some viable companies that could have survived had their leaders acted sooner. Every month of runway is precious. I’m not saying to make knee-jerk moves. Your plan might have two stages. You may have modeled a 30% reduction in sales and a worst case 80% reduction forecast. If so, implement the cost savings you need now to implement the former with a plan to gather data for a month and then reforecast. Don’t hesitate to streamline your venture for the worst case if and when the data is trending that way. Setting decision deadlines based on cashflow will help you pull the trigger on things you need to do in a timely manner. Stay close to your spreadsheets like a pilot to his instruments flying through the mountains on a dark and stormy night.

7. Don’t trickle in layoffs
If you have to do layoffs try to do them all at once if possible. It is soul-destroying for employee morale to see these happening over several weeks because no one knows when it will stop or if they will be next. Do your cuts in a batch and then let everyone know that at this time you do not foresee any more cuts being necessary. Spend some extra time talking with your core team and listening to their ideas on how to get through this. It’s a team effort. Everyone’s ideas are important to hear.

8. True up your sources for capital
If you have less than twelve months of runway you are especially at risk. One of the downsides of making investments is that investors then have to protect those investments. Figure out how much capital is around the table with your current investors as insider-rounds will be the most common source of funding for the foreseeable future. Companies lucky enough to be venture-backed should ask their investor/board member how much money they have put in reserve for their venture and what the criteria are for pulling that money down.

9. Be creative and opportunistic
While battening down the hatches don’t forget that big market changes not only create unusual challenges; they also create unusual opportunities. A competitor might suddenly be open to an acquisition offer. A superstar developer or sales person might suddenly become available. Don’t hesitate to hire a superstar if and when you can because they are rarely available. Think out-of-the-box to make ends meet. I had to switch to selling services for a while during a downturn but it brought in capital and allowed me to keep my best developers employed until our product sales picked up again. After her restaurant and hotel business were shut down last week, one of my entrepreneurs started offering takeout food deliveries and using the valets as delivery drivers. Finally, stay abreast of special government assistance programs, SBA loans and other unique relief that will be coming available.

10. Mind your governances
When cash gets tight founders often do desperate things that can get them into a lot of trouble. Review your bylaws, your legal governance documents and investor rights. Know what your Board has to approve. If an action requires board approval and you fail to get it then you could be personally liable for that loan or pledge of assets as collateral. Most investments include some kind of liquidation preference and it is a serious breach of contract for you to circumvent that liability with senior debt or other creditors without permission. Remember that you cannot “defer” salaries even if an employee volunteers to do so. Employees can keep working without pay if they choose, but legally, if you cannot pay them, they must be technically laid off. Again, over communicate with your board and investors. Involve them in your decision making so that they also feel liable for the outcomes even if what you are asking does not require their consent.

11. Mind employment law
You cannot legally continue to have employees work for you if you don’t have the cash on hand to cover payroll. It may be tempting but don’t risk that receivable coming in to make payroll before the end of the month when things are close to the wire. When it comes to HR stuff the main thing to remember is to be consistent. Stick to the polices defined in your company manual and don’t single anyone out for special treatment as this opens you up to be sued by everyone else for discrimination. You may really want to accelerate options vesting for someone you are laying off but if you do it for one, you must do it for everyone. There are no special cases or circumstances. The best of intentions will get you sued every time. Finally, always pay your people and taxes first when cash gets tight. Vendors and other creditors can be stretched out in an emergency and they are usually more understanding in working out a payment plan with you.

12. Consider salary reductions
Employees are almost always your biggest expense. Along with layoffs, several of our founders, CEO’s and management teams are volunteering to eliminate or significantly reduce their own salaries for a time. This sends a strong message to your employees and stakeholders that you are sharing in their pain and prepared to do your part. Salary reductions can significantly extend your runway or enable you to keep a few extra much-needed employees.

13. Don’t move immediately to deep discounting
We most likely invested in your company because you have a product that demonstrates proven ROI. Even if sales slump in the short run, you may find that once companies reopen there is more demand than ever for your solution. In a recessed economy, buyers tend to focus more on providers that offer better-faster-cheaper innovation. When downsizing, companies have to figure out how to do more with less. You may discover that buyers who once didn’t care about saving a little time or money are suddenly very focused on these and even willing to pay a premium.

Final thoughts:
When you know the road ahead is going to be rough then every new bump just reminds you that you are on the right path. Good companies with strong leadership and value propositions will survive this and find themselves in a world with less competition, an available and appropriately priced workforce and customers hungry for solutions that help them work more efficiently.

David Gardner is a serial entrepreneur, writer, adviser, and early-stage fund manager with over thirty years of experience in creating and building software technology companies.  He is also the Founder and Managing Partner of Cofounders Capital, an early-stage seed fund and startup accelerator focused on B2B software ventures predominately in the NC Triangle area.