In early March, Columbus-based venture capital firm Drive Capital sent a letter to its portfolio company CEOs providing eight steps they can take to improve their companies' chances of surviving this crisis.
Co-founder and partner Chris Olsen summarized the letter in a YouTube video that has since be viewed more than 12,000 times and highlighted on Fortune and BusinessInsider.
Smart Business Dealmakers talked with Olsen about what he is telling portfolio companies, his view of the coronavirus pandemic and how it’s playing out in the market.
“Our message to our portfolio companies is — unless you've seen the last two weeks accelerate your revenue in a way that you previously hadn't — you need to assume that this is going to have a negative impact or this is already having a negative impact, which I would say across our portfolio is 90 percent of the companies that are in there,” he says.
“The ones that are in that camp are hunkering down,” he adds. “They are retrenching around what is their core value proposition and they're evaluating headcount adjustments to their business and trying to ensure that they have a balance sheet that lasts them at least 18 months even if revenue dips.”
What follows is an edited transcript of that conversation, conducted in late March.
What are you seeing right now in dealmaking?
I think capital markets, broadly, are slowing down dramatically. What you're seeing reflected in the public market manifests itself in private markets in the form of deals not getting closed, getting closed on substantially different terms or getting delayed.
Right now, people are resetting their investor expectations and trying to figure out where the new market is. I'm seeing firms bifurcated into the realm of being very brutal about pricing and re-cutting deals 20 to 30 percent or maybe even more.
I know others who are saying, ‘Look, we had an investment. We signed up to those terms. Yes, the market changed, but our reputation is something we've built over 50 years and whatever the new valuation is it's irrelevant because we want to prove to you that we’re being a good partner.’
It's interesting to see how our firms are behaving differently.
Is this across industries? Are some industries a little more insulated or heating up?
Anything that is selling to an enterprise, unless there is a very clear value proposition where every dollar you spend saves you 10 right now, it's not a five-year value. Those companies are falling off a cliff. The new pipelines have vanished and the existing customers are reevaluating what are strictly mission-critical services.
That said, there are areas where this has been an enormous tailwind to businesses. For example, any of our online gaming companies, online education companies, those companies are doing incredibly well. Interestingly, we’re also seeing a lot of continued momentum in the insurance category. I think any category where, if you're seeing a health care value proposition around telehealth or software that gives hospitals or care providers better intelligence about what they're doing, we’re seeing the market really start to move quickly and accelerate to adapt to those things.
Then the other sector I would say that we're seeing a lot of continued tailwinds is anything that's U.S.-based manufacturing. We’re seeing an enormous shift in supply chain where big companies that may not have previously appreciated their exposure to foreign geographies are now saying, ‘I need to have a fully diversified and also a more domestic-driven supply chain.’
So companies that are advanced manufacturing or able to make stuff in America are seeing an increase in the number of business opportunity.
How are restrictions on travel and social distancing affecting the way deals are being done?
What's fascinating is in this time of crisis the relationships are less important. I’m seeing decisions get made on a far more transactional basis.
The need for a steak dinner to close a big deal, that's gone. I think people are looking at this and saying, ‘Show me the data, show me that it works, validate it. OK. I'm in.’ You can get those investments done.
I think people are very shrewd and far more transactional.
What are your portfolio companies saying generally about their situations?
Our message to our portfolio companies is, unless you've seen the last two weeks accelerate your revenue in a way that you previously hadn't, you need to assume that this is going to have a negative impact or this is already having a negative impact, which I would say across our portfolio is 90 percent of the companies that are in there.
The ones that are in that camp are hunkering down. They are retrenching around what is their core value proposition and they're evaluating headcount adjustments to their business and trying to ensure that they have a balance sheet that lasts them at least 18 months even if revenue dips.
What might portfolio companies expect from those that hold a majority share in them in terms of help?
From our standpoint, we are happy to support the companies and to prop up the companies that are being decisive and taking all the necessary actions to make their businesses as strong as possible. Those are the companies that we will continue to invest in, continue to support.
The management teams that are pretending like business is normal and this isn’t going to impact anything in my market despite the data telling them the opposite, we're having very difficult conversations with those folks and it'll be very challenging for us to continue to support those companies.
What would your advice be to operators about the types of conversations that they should have with their investors?
I think this falls in the camp of you’ve got to run to the roar, meaning that you might be afraid of what your investors or your owners might tell you about where they fit, but you're much better off to call them and have a very candid conversation with them.
We have been very active on the phone. I'm talking to all of my companies every single day right now because I want to make sure that we are all on the same page and we have alignment around what the game plan is. The challenge is they're dealing with this very quickly evolving scenario as well, so it requires a more frequent cadence of communication and oftentimes different forms of communication, too.
We're adapting to this, but I think that above all else you've got to have a good line of communication with each other so that you've got the ability to gain a line on what your strategy is going to be, as short-lived as it might persist.
How would you compare what's happening now to what you experienced in 2008? What are the similarities and differences?
It's tough to know ultimately how this shakes out. By my estimation, we've only just started the economic impact of the actions that we've seen here.
We've got portfolio companies, though, that are in the payroll space and we are seeing that payroll is down 56 percent for millions of workers. The impact of this — all of those workers have rent or mortgages that they're going to have to pay, and the way this will ripple through the economy — certainly if this continues, will be worse than 2008. As that starts to unfold, the difference between now and 2008, I think is everything is exacerbated by the fact that we're not working together in an office.
There are no war rooms. This is Zoom, this is telephones, this is distance communication. And as improved as those lines of communication are, I don't think they are as effective as being able to get the smartest brains around you into a room.
So I worry that we’ll struggle to implement the kinds of solutions that we all want to and need to as quickly as we were able to in 2008 until we can get back to work.
Do you feel that those operators, founders and owners who work through and whose businesses survived 2008 are taking this more seriously?
Yeah, there's 100 percent correlation with experience and willingness to recognize the severity of the situation and then subsequently make those actions.
Anybody who was working in 2008, they're the first one to move aggressively and more decisively. They needed far less awareness around what's going on.
I think first time CEOs that are still in their 20s now and who never lived through it, we’ve had to have far more conversations and educate them around what this actually means for their business and I think this is where that experience does help a lot.
What's your advice to investors? Are there things they should be doing now to mitigate their risk or their losses?
The time to buy insurance has passed. The barn is already burned. I don't know if it's half burned or if it's 100 percent burned and I can't call it the bottom, but I think the last thing you should be doing right now is selling.
What you should be doing now is taking whatever cash you have and getting ready to invest it when you believe that the opportunity is more certain in the future and you can start to calibrate where the returns will have potential.
As scary as it is out there today, we've lived through a lot of these crises. I believe we will get through this one, too. I don't know what it will look like when we get the other side, but I know it will be better than it is today.