Advice and support for our portfolio
This once-in-a-generation disruption to humanity and the global economy means we are in a period of extreme uncertainty. For our portfolio companies, we focused on three fundamental points:
1. Employee health and steps taken to keep both the team and society as a whole safe during this period, whilst maintaining a level of operational efficiency.
2. Cash runway both short and long term. We advised all founders to deconstruct their budget and look for ways to extend their runway – the objective is to create maximum optionality when Covid 19 stabilises in 3-6 months. In the longer term, we have to revise the strategy around future funding rounds by taking into consideration new market dynamics and the knock on effect on round size, timing, valuation and which investors are open for business.
3. Look out for opportunities – as many sectors go through major crises, there will be needs and pain points that emerge. Demonstrating ability to quickly to address these needs will help to keep customers and maybe even win new ones during this difficult time.
B2B companies will experience much longer enterprise sales cycles burdened by budget constraints, slow decision making and caution. Our portfolio will have to think carefully about what to do with their technology and teams in the interim and find ways to extract more opportunity from existing clients to sustain revenue.
In terms of B2C, one should be thinking creatively around how to help consumers in a way that speaks to their current needs and use this crisis to build loyalty in a time that really matters. Our companies are working hard at this, so watch this space.
What are we seeing and hearing in the market
Funds are acting with caution. Decisions will be slowed and sentiment gaps will exist as what is usually a highly personable, instinctive investment process becomes completely digitised. On the whole most established venture funds with institutional investors are open for business. We have however seen a number of small angel and seed funds – backed by individuals potentially out of pocket – close shop. We may also see some captive funds, linked to a single LP pull the plug at any point.
In terms of strategy, funds halfway through their cycle will need to assess the impact on IRR and performance. This may call for a shift in portfolio construction, whereby they will move away from taking a wide approach and rather invest deeper into their winners.
For startups, the wider macro trends generally remain in their favour. However, it will undoubtedly be a very stressful time for founders and their teams. Working from home will be a way of life for the foreseeable future. We see teams splitting key persons to ensure continuity which is a highly sensible measure. While start-ups are usually credited for moving fast and breaking things, now is also a time to pause and consider carefully if business plans can cope with new worst case scenarios. As such we see companies quickly securing additional funding from existing investors as safety buffers to their runways. Whilst the industry has started to step in and help by creating emergency funds for example. The biggest unknown that is yet to be determined, is how government will act?
A time to be deploying capital
As long term investors we will continue to make new investments. At Outward, first and foremost, we look for opportunities to fundamentally improve large global markets or to create new categories. That remains unchanged. In these uncertain times, the founders that impress are those who have a natural awareness and adaptability. Are they looking for opportunities in this crisis? Are they building optionality in business plans? Will they prove valuable in the aftermath – where the world will be different and priorities will have shifted?
This challenging period provides an acute reminder of the risks of entrepreneurship. There will be no soft landings for entrepreneurs in the next few months. The start-ups that weather this storm are those that are indispensable to their markets.
To all entrepreneurs, one final note
As an investor in early stage companies, the greatest concern has always been too many founders commit to long entrepreneurial journeys without having done enough market research. When good teams meet the wrong markets, the markets win. For fintech, Covid-19 will bring permanent shifts. The move from cash to cards will accelerate. Building new brands in consumer financial services may now require a different approach. Employers will realise that financial well-being may not be the primary driver of workforce productivity and diversity. The gig economy may see fundamental changes.
If you’re an entrepreneur starting out, it is vital to get a feel for these changes. Think carefully about the addressable market that you’re trying to capture. Fast forward to when the world comes out of this crisis and ask yourself is your business really applicable? Be sure the idea, the problem and the execution is bullet proofed as these will soon face far more scrutiny than ever before.
Now is the time the real winners will begin to emerge.
