the funding ecosystem, good governance and boards … · % investors expecting a down funding...

© Ronald Weissman, all rights reserved.

THE FUNDING ECOSYSTEM, GOOD GOVERNANCE AND BOARDS IN TIME OF

CRISIS

DR. RONALD WEISSMAN

ANGEL CAPITAL ASSOCIATIONBAND OF ANGELS


BOARD BEST PRACTICES IN TIME OF

CRISIS & PANDEMIC

•The Current Funding Climate

•Director Best Practices


“CASH IS KING. IF YOU DON’T HAVE CASH, YOU WON’T HAVE A COMPANY.”

– BILL PAYNE, FRONTIER ANGELS


52% OF STARTUPS REPORT 20%+

REVENUE DECLINE

41% HAVE LESS THAN 3 MONTHS OF

CASH


EARLY STAGE FUNDING:

WHAT DOES Q1’20 TELL US?

• The top-level view suggests that little changed as overall $ invested increased 10% in Q1

• But mega-deals already in process of closing dominated Q1 in most regions and sectors

• Being a small % of total dollars, the Q1 decline in early stage capital is hidden by the “big picture” total venture investing


LOOKING DEEPER AT Q1: SEED AND ANGEL $ DECLINE

Seed $ decline

• North American Angel and seed round $ declined 21% from Q4’19 to Q1’20; the number of deals increased (Crunchbase)

• CB Insights believes Q1 has seen the sharpest decline in startup funding in 10 years.

• Several coastal startup hubs have seen sharp YoY Q1’19 vs. Q1’20 funding declines

• Boston, down 22%

• New York, down 29%


SILICON VALLEY SUGGESTS A MORE COMPLEX REALITY

• The big picture suggests that Silicon Valley deal climate remains strong

• But mega-deals mask trouble

• The impact of COVID-19 did not begin until mid-quarter


SILICON VALLEY:# DEALS Q1’20

MONTH-TO-MONTH DECLINES WERE

STEEP AS COVID'S IMPACT HIT IN

FEBRUARY/MARCH

47

31

2628

12

8

14 13

6

0

5

10

15

20

25

30

35

40

45

50

Series A Series B Series C

Number of Deals

January February March

Source: Silicon Valley Venture Capital Flash Report First Quarter 2020, Fenwick & West, Q1 report.


S ILICON VALLEY:MEDIAN STEP-UP

VALUATION FALLS 55% JANUARY - MARCH

MONTH TO MONTH DECLINES WERE STEEP

AS COVID'S IMPACT HIT IN

FEBRUARY/MARCH

117%

68%

76%

59%

46%

30%

0%

20%

40%

60%

80%

100%

120%

140%

Average Median

Increase in Valuation From Last Round

January February March

Source: Silicon Valley Venture Capital Flash Report First Quarter 2020, Fenwick & West, Q1 report.

73% OF ANGELS PLAN TO INVEST IN AS MANY OR

MORE DEALS IN 2020 THAN BEFORE COVID

27%

2%

71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Source: Angel Capital Association, COVID-19 impact survey of angel groups, April 2020 Fewer

dealsMore deals

Same number


23%15% 13% 13%

36%

0%10%20%30%40%50%60%70%80%90%

100%

Down 1%-2%

Down21%-40%

Down>40%

Higher NoChange

Down 1% - 20%

Groups Down 51%

Estimate of Dollars Invested Total Year (2020 vs 2019)

36%

13% 14% 15%26%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Down 1%-2% Down 21%-40%

Down>40% Higher No ChangeDown 1% -20%

Groups Down 63%

BUT 2/3 OF ANGEL GROUPS EXPECT TO INVEST FEWER DOLLARS

Source: Angel Capital Association survey of impact of COVID-19 on angel groups, April 2020


AND ANGEL INVESTING HAS ALREADY SLOWED

-33.9

-55.6

-13

-47.4

-26.3

18.3

-25.1

-36.2

-60

-50

-40

-30

-20

-10

0

10

20

30

Deals Dollars

Angel Deals & Dollars% Change from Q1'19 to Q1'20

Jan Feb Mar Q 1

-27

-31

-8

-29

-35

-30

-25

-20

-15

-10

-5

0

B2B B2C Healthcare Software

Angel Deals by Sector% Change from Q1'19 to Q1'20

Source: Jeffrey Sohl, et. al, “The Angel Market and COVID-19: Building Bridges or Piers,” Center for Venture Research, University of New Hampshire, May 19, 2020

ANGEL SURVEY: 50% REPORT LOWER VALUATIONS SINCE

COVID CRISIS BEGAN

• Valuations already appear to be declining

• “Same” may also signal that it is too early to assess—perhaps no recent deals

• Source: Angel Capital Association, COVID-19 impact survey of angel groups, April 2020

0%

49% 49%

2%0%

10%

20%

30%

40%

50%

60%

UpDown

Sam

e

Unsur

e


VCS EXPECT VALUATIONS TO RETURN TO MORE REASONABLE, NORMAL


APRIL’20 SAW FURTHER US VC ACTIVITY DECLINEDEALS AND $ DECLINED JANUARY TO APRIL BY 36%

YEAR OVER YEAR DEALS AND $ DECLINED 43%

Source: PItchbook

$11,302$10,449

$13,729

$7,335

936

830 867

600

-

100

200

300

400

500

600

700

800

900

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

January February March April

Dollars (B) Deals

$12,848.00

$7,335

1,060

600

-

200

400

600

800

1,000

1,200

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

April '19 April '20

Dollars (B) Deals


Q1’20: EXITS FALL AND LPS RETREAT TO LATER STAGE

FUNDS

M&A

• The number of M&A exits fell 17% from Q4’19 to Q1’20

• The deal value of M&A fell 50%

IPO

• The number of Q1 IPOs fell 50% (Crunchbase).

• Early Q2: The value of April IPOs was the lowest since 2010 (Bloomberg)

• IPO $ value fell 50%+ from 4/19 to 4/20 and >50% from Q4’19 to Q1’20

LPs

• LPs claim to remain committed to existing funds but have not yet felt the impact of fewer IPO and M&A distributions

• Global flight to late stage: 60% of new funds were $500M+ and the number of funds <$250M fell from 35% in ‘29 to 20% in 2020. The fall was sharpest for funds < $100M. This is the sharpest fall in more than a decade.


PREVIOUS FUNDING

SLOWDOWN TOOK 18

MONTHS TO RECOVER

Source: https://tomgunguz.com, March 12, 2020 (Thomas Tunguz, Redpoint Ventures)

During the Great Recession Early Stage VC (A, B, C) Financing Declined 40% & Recovery Took Six Quarters


T H E NV C A :

C A P I TA L C RU NC H C O MI NG

“Maryam Haque and Justin Field, “Startup Ecosystem Faces Capital Crunch over Coming Months,” National Venture Capital Assoc., April 27, 2020


COVID-19 Impact starts; recession fears become widespread

Fewer IPO, M&A Exits,

fewer distributions

to LPs

Reduced LP Commitment to VC,

CVCs pull back

Fewer Venture and CVC $ for startups

ANATOMY OF A CAPITAL CRUNCH

Massive funding of Seed Stage startups

COVID-19 impact begins, revenues fall

Expense & staff cuts

Milestones needed for funding are

missed

More startups

compete for fewer follow-

on dollars

Serious to Severe Cash

Crunch

Follow-On VC Funding

AngelBacked

Startups


VOICES OF THE INVESTOR ANDCEO 41

65

20

55

71

% CEOS with < 3 months of cash

% with < 6 months of cash

% with pulled termsheets

% with significant deal delays

% in impacted industries

84

80

20 -30

% Investors expecting a down funding climate

% expecting down climate to last > 1 year

% lower valuation (from ‘19) expected by investors

67% expect tougher healthcare startup funding in ‘20 vs. ‘19

Sources; Startup Genome, TechCrunch, 500 Startups Invetor survey, Pitchbook , SVB, Rock Health, Sandalphon Capital

7200 # Pitchbook startups with cash-out risk

82% VC funds with no recession experience


• Fewer IPOs, reduced M&A exit values• Harder to raise VC from Institutional and Family Office Investors, especially small/new funds

• Startup Revenues Fall: 52% of startups saw revenues decline 20% -100% after four weeks into the crisis

• Harder Startup Fundraising—Series A Crunch• Longer Time to Close Deals, tougher terms (increase in participating preferred—Pitchbook)

• Old Deals or New Deals?

• Funding Falls: VC $ and deals fell 35% from Jan to April.

• Angel median valuations fell 7.5% in Q1 even though crisis didn’t hit until mid-late Q1 (Pitchbook)

• Seed median valuations declined for the first time since 2012 (Pitchbook)

• Series A Crunch?

• Funding Drought May Last Longer: The investing down cycle may last for 18 to 24 months

• Retreat of Corporate Venture?

• Mass Extinction? Startups face mass extinction without a government bailout: 40% are cash out in 3 months

CAPITAL FORECAST: INCREASING CHANCE OF DROUGHT


But:• One quarter is a data point, not a trend.• Experienced investors know that down cycles are great times to invest. • VC deals in process are getting done. $120B in VC dry powder.• Sectors matter: health, security, e-learning, mobile, teleconferencing and Internet

infrastructure are flourishing while travel, leisure, retail and hospitality are hard hit. • Regions matter, too. Midwestern CEOs report more cash, longer runways, less negative

COVID revenue impact and are more optimistic than coastal CEOs.• Many options exist beyond Angel/VC: RBF, debt, angel syndication, factoring…• Harder to get funding isn’t always a bad thing. Less crowded sectors benefit strong,

surviving startups–and investors. Everything is cheaper and valuations aren’t crazy.

CAPITAL FORECAST: CROSS CURRENTS


S&P 500

2000 Internet Bubble50% drop;7 years to fully recover

2008 Lehman Bankruptcy / Great Recession45% drop,4 years to fully recover


S&P 500

2020 COVID-1920% drop (so far),5 months to recovery…


OTHER POS IT IVE S IGNS

• IPO market activity

•Zoominfo: 62% uptick at IPO

• Vroom: 100% uptick at IPO

• IPO filings

•May pitch deck VC interest highest in three years (DocSend)

•Angels and VCs: “open for business and adapting”


GUIDANCE

Companies• Conserve cash & re-plan• Focus, focus, focus• Overcommunicate• Explore revenue

alternatives such as services

• Explore financing alternatives

• Embrace your customers• Make progress on metrics

& milestones• Understand what it will it

take to thrive, not just survive

Investors and the Board• Embrace management and

build trust• Set the agenda and help

focus and re-plan• Insist on Good Governance• Dig deep, then dig deeper• Build crisis management

reporting tools• Mobilize fellow investors• But ... don’t let COVID be

an excuse hiding bad strategy or poor execution

• Bottom line: mentor with empathy and honesty



CRISIS & PANDEMIC



CRISIS & PANDEMIC

• Set the Agenda––Cash is King

• Plan/Re-Plan

• Mentor with Empathy and Honesty

• Build a Good Governance Culture


SET THE AGENDA


SET THE AGENDA

Situation analysis:• What are the company’s key risks?

• What’s the cash runway

• What’s the capital climate?

• What’s happening to other startups?


SET THE AGENDA

• Assess the situation realistically

• Do we have adequate resources for business continuity and success? Anticipate company needs:

• Financial capital

• Leadership and human capital

• Innovation, IP and technology

• What are our primary challenges?

• Meet with the entire management team

• Solicit external views, especially the voice of the customer

• Listen more than speak

• Dig deep, then dig deeper

• Understand root causes

• Don’t let COVID-19 be an excuse masking poor strategy or weak execution

• Not every company problem is a COVID-19 problem

• “We will not have reached peak crisis until Boards have run out of problems to blame on COVID-19”––John Huston (OTAF)

The buck stops with us –– we are fiduciaries


SET THE BOARD AGENDA: REVIEW FINANCIALS

Review the accuracy of financials:

Is the company’s financial house in order? Can we trust our financials?What is our cash runway? When is cash out?How do we know cash forecasts are accurate?How up to date are our AP and AR views? Any risks or potential surprises with payables?

Review revenue assumptions, including sales forecasts and installed-base health:

How are we evaluating sales forecast assumptions? Are our “90% done deals” really going to close? In this lifetime:?How fragile is our customer base? How concentrated in hard-hit sectors?How do we support, retain and delight existing customers and entice them to keep paying us?How will we survive if customers cease spending for a quarter or longer?Have forecasts been updated to reflect global market turmoil? How experienced are our salespeople? Why do we believe their forecasts in today’s changed world?


SET THE BOARD AGENDA:

REVIEW THE FUNDRAISING PLAN

When do we need to raise capital? Have we socialized the deal with targeted investors?

What milestones and metrics do we need to achieve to attract next round investors? Have we asked them recently, since COVID-19?

What if investors close their wallets? Have we reached out to existing investors?

Has the company set valuation expectations with existing investors appropriate for today’s market?


SET THE BOARD AGENDA: REVIEW THE ORGANIZATIONAL PLAN

What happens if we lose key team

members?

Do our cash and equity compensation plans still align with our strategy and current realities?

How do we protect our intellectual capital

during a time of staff attrition?

How stable are our local and offshore

development teams?

How vulnerable are our critical materials,

software or hardware supply chains?

How do we ensure regulatory compliance?

Is survival enough? If we weather the storm will we also have continued

to innovate and to achieve key milestones?

What is our “Plan B”?


FOCUS ON CASH

• Help management extend the cash runway

• Cut what you think you need to then cut deeper -- avoid “death by a thousand cuts” later

• Defer all non-essential projects and expenses (Here’s looking at you, Marketing!)

• Defer non-essential hiring, non-essential capex

• Triage accounts payable, renegotiate long-term commitments

• Fundraise, pass the hat to existing investors and the Board and syndicate deals with your network

• If the environment makes new investors less willing, angel syndication becomes even more essential

• If you fundraise remotely, prepare for much more extensive diligence in the absence of face to face meetings and company site visits –– Alan Patricof, Greycroft Partners

• Apply for government funding, but don’t chase rainbows

• Consider non-traditional financing (RBFs, venture debt, working capital lines, factoring receivables)

• But continue to invest in competitive innovation in order to thrive, not just survive

“Hope is not a strategy” ––Pat LaPointe, Frontier Angels


HELP MANAGEMENT FOCUS ON WHAT’S

IMPORTANT

Q: How do you know what’s important?

A: Build a crisis management dashboard, defining key survival milestones and metrics (KSMs).

• Cash and cash out date

• Metrics driving the business

• Metrics tracking organizational health

• Metrics tracking installed-base health, including early warning of customer churn

• Exceptions that could risk the business (such as IP and other litigation, fines)

• Assign owners to data collection and dashboard reporting

• Track daily, circulate to the Board weekly or when there is a material change

• What is moving from the “To Do” to the “Don’t Do” list?

• Take a portfolio-wide view and compare peer companies

“Focus means saying NO. It doesn’t mean saying YES.” – Steve Jobs


THE MAJORITY OF TECH CEOS* ARE UNPREPARED FOR

THE CRISIS

“The majority of tech CEOs track revenue growth and profitability, yet only a portion currently measure cash burn rate. According to Gartner, this lack of focus on cash burn rate has led to severe cashflow problems …If a company has less than three months of cash runway, its chances of financial survival are slim. For those with three to six months of cash, survival will require drastic cost-cutting, acquisition of additional capital or sale of the company. If the organization has more than six months of cash available, Gartner urged tech CEOs to take immediate action to extend this out to at least 18 months to ensure both long-term survival and opportunities to fund the company further.”– Gartner Group March 2020 Global CEO Survey, as summarized in Computerworld, May 6, 2020

* with revenues of $250M or less


PLAN / RE-PLAN


PLAN / RE-PLAN

• Good governance requires a Board-approved plan

• Is ours still realistic? Which assumptions are no longer valid?

• Does the capital plan reflect current realities about cashflow, revenues and likelihood of achieving fundraising targets?

• How about the staffing plan? What projects or functions can we do without?

• What are our current cash requirements now? Our longer-term cash requirements to become sustainable?


PLAN/RE-PLAN: STRESS TEST THE EXISTING BUSINESS MODEL

• Is our market focus still relevant? Is a pivot needed from a weak to a strong market? From selling to Hilton to selling to Charmin?

• Are we measuring CAC, churn, MRR and sales productivity?

• Do we have to make a physical site visit to sell to customers? Can we sell and install remotely?

• Can we accelerate sales by closing smaller deals earlier? Faster onboarding? Simplifying the product or our marketing message?

• Is the product plan market-driven or engineering driven?

• Is it based on customer must-haves or nice-to-haves?

• If we build it, will they buy it? How do we know?

• Does we have visibility into engineering, sales, marketing, finance, regulatory affairs and customer service to separate must-haves from nice-to-haves? And to identify departmental crises early?

• What do we no longer need to do? Can we stop today, please?


MENTOR WITH EMPATHY AND HONESTY

Beyond cash flow worries, the combination of economic, social,

community and severe health risks makes this crisis unique and uniquely stressful for management, employees

and the Board.


MENTOR WITH

EMPATHY AND HONESTY

• Mentor with Empathy• Recognize our CEOs are human and have families and friends in crisis

and may be undergoing severe stress inside and outside of work• Some first time CEOs and minority CEOs may need special help if they

lack deep startup and financial ecosystem ties and networks • Don’t demand perfection. But do demand transparency and “no spin”• Make it safe to admit past mistakes.• Be available to take the midnight call• Build a Board/Management buddy system

• Mentor with Honesty• Be frank about company status, perceived risks and ways management

performance must improve. Boards must improve, too!

• Be flexible and recognize that yesterday’s team may need to shift roles to deal with today’s challenges

• There are no penalties for conveying bad news, only for hiding bad news• “Beware of CEOs who never report bad news.” –– John Huston (OTAF)

• Execute with Class• Overcommunicate with employees, the Board, customers, partners and

the community.• Build plans collaboratively• Criticize constructively and offer best-practice solutions

• Relieve burdens by taking temporary operational roles, if necessary


GOOD GOVERNANCETHE ABILITY TO MAKE INFORMED, FAIR,

TRANSPARENT, AND ACCOUNTABLE DECISIONS EFFICIENTLY, FOR THE

PRESERVATION OF THE COMPANY AND SAFEGUARDING THE LEGITIMATE INTERESTS

OF SHAREHOLDERS AND OTHER KEY STAKEHOLDERS, IN ACCORDANCE WITH

THE LAW.


GOOD GOVERNANCE IN PRACTICE

• Follow the letter and the spirit of Good Governance

• Make decisions in full satisfaction of Duties of Loyalty and Duties of Care. Document them in the Board minutes. At every meeting.

• Revise the Board calendar and meet weekly or daily, if necessary

• Include counsel at every meeting, but don’t hesitate to replace ineffective or “drive-by” counsel

• Have a non-executive directors’ session at every Board meeting

• Have a Board succession plan and a rotation schedule

• Data-driven Governance

• Co-develop with management key metrics that drive the business and use those metrics to monitor risks and anticipate future crises

• The Relationship of the Board and Management

• “Has the Board built trust with management? If not, when a crisis hits, it may be too late. “ –– Pat LaPointe (Frontier Angels)

• If management views Board recommendations as merely the product of narrow investor self-interest, the Board may, itself, risk company survival

• Is the Board viewed as playing an essential role in oversight? As an opportunity, not a nuisance?

• Have Board members learned to work together to resolve crises, even when issues are tough or contentious?


GOOD GOVERNANCE IN PRACTICE

• Effective governance

• Directors understand fiduciary obligations

• Have an Executive Committee if Board is large

• Have systems in place for resolving conflicts of interest

• Conduct timely and data-driven risk analyses

• Understand Red Zone risks, mandatory payables and liabilities

• Unpaid wages and vacation time

• Federal and state taxes, including disability

• Potential Board of Director financial penalties

• Keep D&O premiums paid up

• Understand the trigger points, mechanisms and timing for a worst-case orderly shutdown

• Understand your worst-case options. Know when to hire:

• Banker (sell the company)

• Accelerator (sales consultant)

• Excavator (turn-around expert)

• Undertaker (orderly shut down)


• Board lacks focus• Board in conflict• Drive-by Board• Self-dealing, insider term sheet• Lack of team spirit• Failure to anticipate crises• Illegal company activity• Failure to prevent company

meltdown

• Crisis dashboard and strong agenda• Strong ethos of Duty of Loyalty• Strong ethos of Duty of Care• Director recusal, independent director• Board worked hard to work well together• Strong oversight and monitoring• Strong Board, independent of management• Strong governance culture, trust between

Board and management

Facing Crisis: Bad Governance or Good Governance?


IN TIME OF CRISIS, OUR DIRECTOR ROLES AS FIDUCIARIES AND STEWARDS ARE ESSENTIAL TO HELP OUR COMPANIES THRIVE, NOT JUST

SURVIVE.


[email protected]

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