Are you at post accelerator stage or have you just closed a round in the last 6 months? Are you feeling overwhelmed or getting ready to brace the storm? We are running through some practical decisions and also the best ways to keep your investors aligned and with you, in this chaotic time.
In this conversation with Ogunte CEO Servane Mouazan, on 23d of March 2020 investor Zoe Peden, Impact Tech entrepreneur turned VC at Ananda Impact Ventures, looks at how organisations in the post-accelerator phase of growth can respond to the impact of coronavirus on their operations. The piece also features futures thinking approaches and insights from Bates Wells Mark Tasker – who heads Bates Wells Corporate and Commercial department and has more than 25 years’ experience of advising clients on corporate transactional work – on the legal questions entrepreneurs should think about when preparing to meet the challenges presented by what continues to be a fast-moving, fluid situation.
Servane Mouazan: Zoe, in this chaotic phase Covid-19 brought about, what attitude do you encourage entrepreneurs to adopt, as they contemplate their next steps?
Zoe Peden: No plan survives first contact with the enemy. But it can help you prioritise your thoughts and add structure to discussions with your board and/or investors.
All impact companies have ups and downs and you normally have base case and best case when budgeting regardless to help you understand when the next funding round is required or warm up your investors for a bridge round or perhaps to break even.
With covid-19, there is an added element which is out of our control currently. How long is this lock down going to last?
You need to have a set of variable plans
SM: Can you run us through these Plans?
ZP: Yes!
- Plan A might be to keep everything as it is – just trimming small extras
- Plan B might be a 20% or further cut in costs, all depending on how much cash you have in the bank – your runway time.
But this lockdown might possibly last 3 months, 6 months (education sectors hit through spring and summer) or 12 months in some form that impacts your business’s revenue by a percentage.
Therefore, your Plan A needs 3 versions (projection at 3, 6, and 12 months), Plan B needs 3 versions too and you could of course have a Plan C which is a merger/sale, and finally a Plan D which is a closedown.
If you have less than 4 months then you need to be talking about bridging with your existing investors now on a convertible loan note or equity round. Expect those liquidation preferences and anti-dilution clauses to come into play for the investors to protect their downside.
If it’s less than 4 months or more you need to model the scenarios to your board and investors so that you can discuss appropriate financing at each stage – whether it’s the government loans, VAT holiday or a bridging loan or having to go out to new investors. The latter will take some time to ramp up.
Engage in conversations every week at the moment to calm everyone down then move to every month once you have more of an idea where you are positioned against base/best case and more understanding about the assistance you need.
SM: What about the Government support?
ZP: The government has put together a package with loans, PAYE support for employees up to £2500 (most helpful for seed companies), VAT holiday, and business rates are lifted for certain sectors. We are waiting to see if British business banks come up with any support for tech companies at seed stage – which are the most vulnerable.
SM: What’s happening at Ananda VC?
ZP: It has been a busy week with a mixture of difficult moments and amazing high points, despite the crisis. Clearly the whole portfolio is being challenged to a great degree, but we feel both the UK and continentally based companies are all rising up to the challenge.
On the positive side, we can clearly see that the topics and impact focus which our portfolio companies are active in, such as health, ageing societies and sustainability will be just as, or even more important after the current crisis. Therefore, they should be less negatively affected by the current economic downturn than some peers, though facing the same cashflow and operational challenges in the immediate future.
SM: This sounds good. So what are your practical next steps?
We are open for new investment, alongside being champions for our existing portfolio. We are active in remote sourcing and virtual office hours. Everything will take longer and valuation expectations from founders will need to adapt to the new normal. Some first-time funds will be suffering as LPs get nervous with drawdowns, whereas those in 3rd or 4th fund with track record will survive better.
Our decision-making is unchanged and we are used to working remotely across Europe London/Berlin/Munich and Budapest.
Valuations have recently been out of control so we can be sure they will be reset. Companies that are overvalued will struggle to show growth to match those high valuations so there will be casualties in the next 12-18 months if not sooner.
Expand your network and build relationships
SM: What are your 4 key tips for founders?
ZP:
- Add another 20% on for timing
- Have a slide or at least mention Covid-19 and that you have taken it into consideration in your projections and how you are responding and make that clear in your assumptions
- Go beyond Crunchbase to find your investors, plenty of capital out there. Ask other founders and also your peers’ WhatsApp channels.
- Strangely you will have more access now to investors since they will be travelling less. You therefore need to make the most out of it and see those investors virtually 12-18 months before you need investment so they can track you. Think “Lines” not dots.
SM: And in the VC world generally?
ZP: There will be new sectors of focus, for instance: life-long learning, future of work. passion economy enablers, enterprise tools/platforms that facilitate high quality content at scale, disruptive consumer brands targeting niche highly engaged communities, future of entertainment, innovation in crisis.
SM: Thanks a lot Zoe, now let’s turn to Mark Tasker, from law firm Bates Wells. Note that Bates Wells is the first UK law firm with a B Corp certification. Mark, what is your take on the situation and what would you suggest entrepreneurs to look at from a legal perspective?
Mark Tasker: Businesses and other organisations are still trying to come to terms with the enormity of the situation that they are currently facing. For many, the first step is to try and make an assessment of cash flow over the next few weeks and months on a best case/worst case basis. That will often be very hard. How far out should you try to look and the longer you look out the harder it gets? What Government support schemes can you take advantage of and how quickly can these be turned in to cash?
Whilst the Government’s proposals will be enormously helpful the process and exact implications remain opaque and, in some cases, still unknown. The situation remains fluid.
Once cash flow projections are established, this about what the business can afford in terms of its costs to be sustainable during this period.
The first casualty is likely to be any discretionary spending.
Thereafter is when the tougher questions need to be looked at in terms of the cost of employees, customer and supplier contacts, the terms of occupying business premises etc.
For most businesses, costs will inevitably have to be cut and in most cases dramatically but sometimes only temporarily.
In nearly every situation the legal implications must be considered.
The question to ask is what can we lawfully do to cut costs and stay in business.
The starting point will be your contracts and the legal frameworks in which they will be looked at.
For example:
- What are the costs of terminating employment?
- How can you do this without tripping up in to areas of discrimination and other breach of employment rights – this is a mine field at the best of times;
- Can you put supplier contracts on hold or terminate them?
- How can you deliver on customer contracts where your business resources are depleted or unable to deliver because of the current situation?
The considerations are vast. In some cases, business will JUST DO IT without checking the legal implications. That could make the situation worse.
Without question, businesses must take legal advice on their proposals which will hopefully save costs and anguish in a few months when the world comes through this – as it will. Stay strong and stay safe.
ADDITIONAL RESOURCES
BatesWells – Coronavirus Legal Portal
You can keep up to date with legal firm BatesWells’s content focusing on the legal issues emerging from the coronavirus on their portal here .
If you’d like to talk further with them about any of the topics raised on their hub, or have any queries about other legal matters impacted by coronavirus, please send a direct message to this LinkedIn account or email BDM@bateswells.co.uk.
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