Product, Team Building, and Fundraising Playbook for the Post COVID World
As we enter our fourth month of quarantine, seed stage startup fundraising has begun to pick up since the dramatic lows of March 2020.
(source: Pitchbook)
Valuations (pre and post money) have begun to recover as well.
(source: Pitchbook)
(source: Pitchbook)
Similarly, deal sizes are mean reverting too.
(source: Pitchbook)
Investors, even lead investors in the Series A stage, are growing more comfortable with the idea of virtual only meetings and have begun to write meaningful checks into companies they have never met in person.
While March and April naturally saw companies raising who were in desperate need of lifeline capital, May, June, and the coming months will likely see more mean reversion in deal quality as well.
For some historical perspective and much needed optimism as some indication of what the coming years may hold for companies raising during this time, we look toward the 2008 Global Financial Crisis, when many now public and large private companies raised early stage rounds.
- Dropbox $6 million Series A, October 2008.
- Twilio $600,000 seed, March 2009.
- Airbnb $600,000 seed, April 2009.
- Uber $250,000 seed, August 2009.
- Square $10 million Series A, November 2009.
(source: Pitchbook)
Although there are many aforementioned reasons to remain positive, we are still not quite out of the worst, and the COVID era and aftershocks are expected to persist for some time.
(source: NFX)
(source: NFX)
As investor appetite improves (albeit gradually) and as more founders look to raise capital in the coming months, what are new best practices for building great businesses and investor relationships in our new fundraising environment?
I previously wrote How to Fundraise and Operate During a Pandemic with key advice. Additionally, I have written founder interviews, investor interviews, and operator interviews, including on leaders effectively handling the challenges of COVID.
However, in this article, I focus on distinct insights. For new readers, do read all articles as they have only non-overlapping content.
Product
Re-discover product market fit. So often product market fit is seen as a static condition. In reality, as the macro climate, consumer preferences, and business needs constantly evolve, so must products and the status of a company’s product market fit.
Do not over index to COVID market fit. View the coming months or even years as a piecewise function and optimize accordingly. In the short and medium term future, building a COVID resilient or COVID relevant product is crucial to sustain and grow your business, but plan for and build in a seamless transition to a broadly applicable, evergreen product that will similarly thrive in a post COVID society.
Give product managers more ownership. They frequently have the best interdisciplinary vantage point and most active communication channels with cross functional teams. Give them more agency of their respective products and free up time for department or company heads to focus on the growing macro challenges.
Take advantage of customer needs. When customers are growing rapidly (as companies in select industries are during COVID times) and in desperate need of your product, it is much easier to negotiate higher switching costs (financial and operational). Take advantage of this bargaining power when building and selling your product.
Capitalize on cost consciousness. As businesses across the board reduce costs, they will inevitably do less in-house. Build tools to help them automate these otherwise capital intensive in-house workflows and enable them to effectively outsource non-essential work.
Do note that in some of the less disrupted, more manual industries now looking to outsource more overhead (such as construction), the traditional bottoms up sales approach may not work. Craft a product and pitch that is tailored to the stakeholder dynamics of your target industry.
Invest in brand insurance. When pure capital investment is more rare and challenging in these times, make time based investments in cultivating customer relationships and establishing your reputation. Brand awareness (built up largely through customer acquisition costs) is fundamentally distinct from the trust in the brand itself, and the latter is built up over time through strategic time investment rather than endless capital outflows to Google or Facebook ads.
Financial
Outlast your competitors instead of outspending them. The era of Softbank and other mega deals largely in the capital intensive, unit economics questionable on demand economy, spurred on by our pre COVID frothy markets led startups to adopt an outspend focused mentality. Although investor appetites are improving, it will be a long time before we revert to the pre COVID market dynamics. Take the opportunity to shift your focus from capital as a competitive advantage to differentiation on capital conservation grounds.
Barriers to competition are more rare than true, fundamental benefits in startup building. Outlasting your competitors with financial discipline is one direct barrier.
To this end, connect with your customers who have likely evaluated or have worked with your competitors. Try to understand what you can learn from these competitors and simultaneously better empathize with your customer.
Find your minimal viable burn. Rigorously analyze all drivers of your burn and cut as much as possible to minimize your monthly burn rate. Just like finding your minimal viable product, find and hold yourself to your minimal viable burn to continue company operations in the most lean way.
While this manner of scrappy operation feels temporary, starting from this foundation of conservation will set impactful precedents for your company moving forward. History has shown that disruptive companies can be built during challenging economic times in large part because these founders were forced to operate in a lean fashion from the start, which later defined their long term operations for the better.
Be profitable on the first customer. Structure your unit economics so that you can become profitable on the first customer, thereby lifting the pressure of variable spend and allowing you to bootstrap the business for as long as possible.
Keep careful track of your LTV to CAC ratio. While the ideal number varies from industry to industry, a 3X LTV to CAC ratio is generally advised. Similarly, avoid spending more than 1 year of customer revenue on customer acquisition.
Provide equitable discounts. Your customers may belong to a much smaller world than you think. If you provide certain discounts to some customers but not all, be prepared for some backlash and proper explaining.
Fundraising
Beware of high valuations. In the pre COVID era, high valuations were a norm and practically an expectation for companies and investors alike. Although valuations have recovered since the initial COVID outbreak, they are still depressed relative to the pre COVID bull markets. See this as an advantage: high valuations early on make it more difficult to raise in the Series A and beyond and make dreaded down rounds more likely.
Beware of reopening rounds. On the point of down rounds, avoid reopening rounds solely to avoid a down round. Doing so during turbulent times (unless you are absolutely sure of being able to close) may do more harm than good when you may have trouble closing the additional amount of capital you are trying to raise (so that instead of a mere down round, you now have a round that cannot even be closed).
Build in buffers for transaction process timelines. The process of getting the VC funds to your bank does not end with the signing of the term sheet. Many founders and even investors underestimate the length of time it takes for all documents to be approved and for the money to actually go out. If you are particularly cash strapped, take note of this potentially elongated timeline as you make your financial plan.
Understand that VCs need to support existing portfolio companies. Startups often forget that part of a venture fund’s capital must go not only to new investments but also to support extension or bridge rounds (or other follow on rounds) for existing portfolio companies. Investors, like many people in general, had initially underestimated the extent and intensity of COVID, when they announced they were open for business. While they still may indeed be open to new investments, they are being more selective with their capital due to existing portfolio company needs. Use this knowledge to your advantage as a founder and target relationship building with VCs who have companies thriving or at least growing during the COVID era.
(source: NFX)
(source: NFX)
Offer and be prepared for more customer reference checks. When pitching mostly or only virtually to VCs, they will likely ask for more reference checks, not only from earlier stage investors or previous employers but also from customers to better understand your product and team. VCs will not only explicitly ask for these references but also do their own, more secretive diligence through reaching out to mutual connections on LinkedIn or Facebook.
Plan for future fundraises. While you may be able to successfully raise a seed, COVID and its aftershocks (including a likely recession) may persist for multiple years, which may make raising your next round more challenging. Plan for the worst case by taking necessary internal precautions and building investor relationships early.
Take advantage of Zoom as an equalizer. Beyond making meetings with VCs more accessible, Zoom also partially levels the playing field from a salesmanship perspective. Previously, there was more pressure on founders to truly light up the room they were pitching in. With Zoom, there is less pressure to search for this level of elusive charisma and enables founders to focus more on the actual content of the pitch.
Take socially distanced walks with VCs. If you are in the same geography as some of your prospective investors, offer to take socially distanced walks 6 feet apart. Doing so can at least partially alleviate their concerns around writing virtual only checks.
Remember that early stage VCs have decade long time horizons. While the near term future appears tumultuous for all, VCs fundamentally have long term time horizons to the extent of 7 to 10 years. While VC operations may see some adjustments, their investment theses and their long time perspectives are not meant to change. Keeping this in mind, continue to build toward and pitch on your long term vision.
Team
Hire different people than you did in the pre COVID era. Fundamentally, different team members are needed in the go, go, go phase versus the much more conservative COVID era. Ironically, more cynical people may be needed to take proper precautions and err on the safe side.
Cut only once. Cut as deeply as you need to guarantee just 1 round of layoffs so that remaining employees are not constantly waiting for the other shoe to drop.
Let people opt into layoffs. While people seemingly would like to keep their jobs, there is a surprisingly large population of people who would like to have more immediate closure, especially when multiple rounds of cuts may inevitably happen despite the best efforts of management (to the above point). Give employees this option.
Clearly map layoffs to business strategy. Beyond simply stating that layoffs are not personal, truly show this through connecting all layoffs with forward looking business strategy so all leaving and remaining employees see the careful planning you exercised around these delicate decisions and tough calls.
Be generous around options. While salaries may take a cut with other competing immediate cash flow needs, offer more equity to your employees to compensate for this drop and get them more excited and aligned with the company.
Communication decisions well. More often than not the messaging behind a decision is much more important and impactful than the decision itself. Be thoughtful around how you explain and present key decisions.
