Lessons from 01 and 08: On the VC Ecosystem & On Managing, Hiring, and Raising Capital during a Global Pandemic
Subrata Mitra and Prashanth Prakash, founding partners of Accel & Sarah Kunst is the Founder and Managing Director @ Cleo Capital
INSIGHTS #49 - The state of the VC ecosystem amidst COVID-19 crisis: Prashanth Prakash & Subrata Mitra
Subrata Mitra and Prashanth Prakash, founding partners of Accel who were entrepreneurs before and have seen other downturns in the past, on their take on the COVID situation and how it impacts the VC ecosystem
Accel India Insights (Now SeedToScale Insights) - Podcast Series by Accel
Then and now: 2001 vs 2008 vs 2020
Prashanth’s Netcraft was affected by the dot com bust and subsequent 9-11 in 2001. His 600-employee business shrank to 250, but the positive side was that they successfully pivoted to become a B2B internet service provider, which led to them getting more businesses from enterprises and becoming sustainable over time. However, it took a few years for the market to recover — similarly, the market will take a long time to recover from the current COVID situation.
In 2008, Prashanth and Subrata were fundraisings when the 2008 crisis hit, and it was a big impact on the global ecosystem. However, both past events were more US-centric, whereas for now, the COVID situation is a lot more global and affects everyone.
What efforts have been taken?
Many people in the VC and startup ecosystem have joined forces to help out founders by creating a set of resources to help them navigate through the crisis. If the ecosystem can take advantage of the broader platforms like e-commerce, services, and logistics, they will be able to solve specific problems today like telehealth, education, and more. They just need some capital to get started.
Prashanth talked about the ACT grant, which has resources to help founders deal with company situations, fundraising, and etc. They’ve made 7-8 investments, with 50 analysts and principles from different organizations, and 20-40 venture funds who are invested in the grant fund. They have received 500+ proposals so far.
What is the current state of the Indian VC ecosystem?
Subrata thinks that the fairly well-known, multi-decade institutions should be able to survive and raise new funds at appropriate times, however, the smaller, lesser-known funds will find it hard to raise funds because everyone else is being cautious.
Prashanth sees that firms are focused on securing enough runway for their existing portfolios, capital preservation, and managing their reserves. Investors may only start properly investing post-lockdown to see how customers are re-engaging with the business and to what extent the business is picking up.
Companies that have a broad consortium of investors are finding value at this point in time. It is the companies with fewer investors that will face more significant challenges.
What is the impact on portfolio companies?
For Subrata, sectors badly affected, like hospitality, travel, and ticketing, are under the ‘red’ category, whereas the green category includes sectors with up to 5x increase in their traffic volumes and transactions, like streaming and gaming companies. The people in the middle are operationally heavy companies that straddle between online and offline business models.
Also, large companies have a lot more to lose because they have large teams and have high burn rates as compared to seed or series A companies, who are not yet expected to make revenue. In the end, it boils down to how much runway can be created to tide through this period and if they can come back stronger than before.
Prashanth notes that there are structural issues like the credit and liquidity crunch that India has already been facing that impact the growth ability of FinTech companies. B2B companies will face challenges on the quality of receivables and the need for more capital, and he hopes that the government will provide physical stimuli for their liquidity and liquidity-in-planning.
Any advice for founders?
As a startup, there are things founders can control, and things that they can’t. The amount of things not under their control has increased, so Subrata advises founders to focus on the smaller set of things that they have control over, such as the company’s core and its future.
Founders need to create as much runway as possible. Prashanth says smaller companies may be over-optimistic about the current situation thinking that they can raise funds again in 12 months after their runway is all used up. They will need to merge or eliminate redundant functions, with only survival in mind. Whatever core remains must be of value so that they can rebuild from scratch.
Is this normal for startups?
If your current idea doesn't work and you find something else to work on, the business core will pivot. To regrow from scratch, it’s important to maintain a good rapport with your team, understand how the team dynamics work, and keep them motivated in a respectful yet practical way.
How much runway should be planned, and why?
Prashanth advises founders to prepare for at least 24 months of runway. Instead of re-evaluating every few months, it’s better for organizations to prepare for the worst-case scenario all at one shot. However, if things are starting to get better, founders can accelerate the plan accordingly.
What about advice for founders who are just starting out?
Since there are no assumptions and no losses to their revenue, they are not affected as much. However, investors may look at the 24-month period instead of the usual 18-month for seed investments.
How about founders in the middle of fundraising?
There are two types of scenarios: one, where the funds are still willing to honor the term sheet, and two, the ones that put down conditions they want to see post-lockdown, which are trickier. Generally, entrepreneurs are more flexible on valuation due to loss of time and decreasing revenues. Nonetheless, the valuation adjustments may not get any better for them.
What's it gonna be like after the COVID situation?
Historically, companies that have been able to get through these tough periods come out on top and become strong companies with great results for shareholders. Subrata thinks founders just need to look at opportunities with fresh eyes since global demand is still there. Take advantage of the changes to consumer behavior, run experiments, and find agencies that are doing just that. Always be as resourceful as possible.
On the other hand, Prashanth hopes to see companies with better economics and higher chances of going public. Companies that come out strongly after the COVID-19 pandemic have higher chances of securing more dry powder — with better profit pools and unit economics.
Every time you go through one of these cycles, there are changes in technology and user adoption, so new types of companies come out on top.
For example, BookMyShow is a company that reinvented itself from being an offline ticketing platform to an online one following the dot com bust.
In this COVID situation, Subrata observed transformations in the education and healthcare sectors.
Any other advice to deal with the anxiety?
Show grit, be firm and steady, and be the leader that everybody expects from a founder.
Prashanth says it’s not going to be easy. Find a coach, a friend, or a mentor to work with and confide in. It’s also good for investors to give additional support to founders in terms of emotional and financial wellbeing as well.
Subrata thinks there is no reason to believe that startup founders need counsel from people outside of their portfolio and they can benefit from them being a good listener, helping think things through, or bounce ideas with. It’s a formative stage that investors and founders should all do for each other.
20VC: Sarah Kunst on Why There Is Plenty Of Investor Money Still Available, The Megan Markle Effect and How It Impacts Hiring and Talent & Whether GP Commits Prevent Diversity and Inclusion
(Feb 24, 2021 - 40 minutes)
Sarah Kunst is the Founder and Managing Director @ Cleo Capital with a portfolio including the likes of StyleSeat, Glow Bar, and PlateJoy to name a few. Prior to venture, Sarah served as a senior advisor at Bumble where she focused on their corporate VC arm, Bumble Fund, and on the board of the Michigan State University Foundation endowment.
The Twenty Minutes VC - Venture Capital, Startup Funding, The Pitch
By Harry Stebbings - Founding Partner @ Stride.vc & Founder of 20VCMicrofund
How did Sarah get a start in the venture?
Sarah worked in a startup during the ‘08 crash and was later sourced to a venture company when the startup folded. She founded Pro-Day, a fitness, and sports company, and became a Sequoia scout and Michigan State University LP. After that, she decided to launch Cleo Capital for 2 reasons: direct investing, and helping female founders scout investors and start businesses.
Do investors still have money in a pandemic?
Financially, VCs are still getting paid, and they still have money in the bank to invest. They may focus more on their own winners, but there’s a lot of dry powder left, and VCs still have money for investments.
The bigger question is, how do you get them to unlock it for you?
2008 was the best generation for vintages. What about 2020?
Who knows? To extrapolate from history, it’s hard to make a lot of money when things are expensive. The simplest principle of investing is Buy Low, Sell High, but because of market forces for the past couple of years, it’s been Buy High, Sell Higher. No doubt there will be differences between then and now.
Sarah compared it to buying a house — you can buy a house now in a high-class neighborhood for millions of dollars, and your neighbor may have bought it in the ’80s for 25% of your price after adjusting for inflation. But when both houses are sold for the same price, one person is going to make a lot more money than the other one.
So, how much should I price my early-stage valuation?
The main goal is to build a successful business. Investors may love your deal, but if it’s too expensive, they’ll pass, and tend not to come back to it. If you price it too low, you’re going to end up giving away too much equity and you may not have enough runway long-term to be incentivized to run your company.
According to Sarah, the sweet spot is around 5-10 million dollars in the US.
Dilution happens when you raise half a million dollars at a 2 million valuation and end up losing 25% of the company before even doing anything, and the dilution compounds as you keep raising more funds, even before you’re post-Series A.
How has the pandemic helped with people and character assessment?
Founders have always been synonymous with resilience, integrity, and grit, not only after the pandemic hit. Entrepreneurship used to be perceived as a massive risk, but lately, people are treating it more as a box to check off — if they’re good at it, then great, but if not, then it’s still okay. Being a founder is a bit of a masochistic career path after all.
Bill Gurley calls these kinds of okay-people ‘tourists’ in Silicon Valley.
Any advice for portfolio CEOs during the pandemic?
Either ‘You’re screwed!’ or ‘You’re good!’.
‘You’re screwed’ if your company sells things inherently used outside the home, such as party dresses or travel neck pillows. Your main aim is to just survive, hibernate, and have faith that the economy will recover and people will want to buy from you again.
‘You’re good!’ if your company sells something people want right now, like toilet paper, baby food, dating apps, gaming companies, and the like. This is an amazing time to start running out there and make some real headway.
However, if you’re a startup in a similar space to that of wildly successful companies (like Zoom or Slack) and your daily active users don’t increase, then there’s something wrong with your company growth.
Is reserve allocation still the same after the pandemic?
Long story short, deals still get done, but they might be slower and less expensive. Reserve allocation isn’t a huge part of the model, but ther’re still is dry powder interested in Series B, Series C, and SPVs. If you have a solid, post-Series B company, and you’re growing and having interesting numbers, there shouldn’t be a problem.
Companies in earlier stages have to get creative in terms of showing a lot of growth, sales, customer loyalty, and continue hustling to stay on top of the game. Just make enough money to sort of surviving to live another day.
There’s a lot of money that has been sitting on the sidelines for the last 6, 12, 18 months. The market had been overheated, but now investors are seeing a rightsizing of that and are excited to deploy their capital.
But where do I find the star players to add to my team?
If you know of someone you’d love to work with but aren’t sure whether they’ll even notice you, just go for it and shoot your shot. Slide into their DMs, drop them a message on Twitter or LinkedIn, and you’ll be surprised to find that they may be equally as eager to connect with you.
The Meghan Markle Effect: Nobody would have thought that Prince Harry would marry a small-time TV actress based in Toronto, but she got in front of him and ‘sealed the deal’. The same theory applies to hiring the partner/team member of your dreams.
Anything that should be changed about the world of venture?
Fund managers aren’t diverse enough. More diversity in fund managers actually drives better returns.
But aren’t GP commits fundamentally non-inclusive?
Unfortunately, there are two types of investors who are probably not going to invest in your fund: the type that understands but are structurally obligated to proceed because of an endowment or pension fund with incredibly strict rules, and the type that doesn’t fundamentally understand that everyone in the world is not rich. Both are not good investors for early-stage companies.
Commit conversation gets tricky when life gets in the way, like parents’ welfare, children’s education, mortgages, etc.
As soon as you start making money from your fund, you need to load more into your GP commit to help smooth things over. If you’ve taken a lot of money off the table but are unwilling to put a lot of money into your fund, do you really believe in your fund as much as people think you will?
What if people ask me for a GP commit?
If you’re a fund manager thinking about starting a fund, just be transparent. They want to feel like they can trust you. Don’t stonewall investors and tell them your LP commit is to be determined — just state what you can offer, why, and what you’re going to do about it. The suitable fund and LP would say okay.
What’s the one thing I need to know before starting my career in the venture?
Don’t waste time on anyone — don’t take nearly 10 meetings to get a $25,000 check. Talk to your investors, make sure they seem smart and know what they’re doing or understand how to do what they say they’re going to do.
Just because somebody has money on the other end of a transaction doesn’t mean that your time isn’t valuable and that they’re the only person in the world you should be focusing on.
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