How to discuss the Corona impact on your company with VCs?

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In light of the current crisis, there are already numerous tips moving around on how to manage startups — as well as mature firms — to pull through the economic downturn. Yet another crucial aspect for startups has gathered little attention — investor communication. What to communicate to existing investors, and what to focus on when the crisis hit just in the middle of raising a new round?

Before moving to some common risk factors that can often go unnoticed, we start with some simple guidelines and aspects to cover when preparing for an investor call:

  • Create a plan on how to extend your runway, preferably to at least 12 months. It can include activities like asking your landlord to cut the rent, reducing marketing or referral program costs, refocusing product development only on activities that generate revenues in short term, putting new hirings on hold, or cutting salaries or personnel. Also, you might be able to make use of some of the government support for extending your runway. Learn about the opportunities offered in the form of loans, grants and subsidies. We have provided some links on this topic at the end of this post.
  • Know your way to breakeven. A mere figure of an extended runway won’t help — investors value breakeven forecasts that are backed up by a sufficient scenario analysis. This could mean putting together plans A, B and C in case the crisis becomes longer than expected, or the prospects for additional funding worsen.
  • Ask your peers and investors. Many of our suggestions are based on experience from our portfolio companies, which illustrates the benefits of knowledge-sharing. The tips are even more useful when exchanged among peer companies that follow the same business model (SaaS, marketplace etc.) Sharing is caring.
  • Tough times don’t last, tough teams do. That said, a good crisis strategy also considers an action plan for recovery once the crisis is over. An important note here is that companies who have recently capitalised or have otherwise retained some financial buffer by the end of the crisis have a head start in restarting the operations, since many of the competitors might have disappeared or severely weakened by the crisis. Also, extra cash buffers enable companies to pivot, if feasible.

However, establishing such a crisis plan is easier said than done. Here are 4 factors for supporting the underlying assumptions, as well as answering the questions both the existing and new investors might have:

  • Demand — what is the dynamics of demand for your product or service — how much does it decrease or could the sales instead increase? Highlight the changes in the demand you have seen already, but it also makes sense to forecast the demand dynamics in the future. As an example, there’s no value in hiring more salespeople when customers simply don’t have the resources to purchase.
  • Price — more importantly, what is the relationship between demand and price — is price an important component of demand? Does it make sense to introduce special pricing for the period of the crisis? Considering delayed monetisation could make the customer acquisition more successful. Some of the companies are still reaching out to potential customers, onboard them, but start monetisation later.
  • Execution — Can your company function with all team members working remote? Are the purchase and delivery channels working? Quite intuitively, the delivery of physical goods, as well as offline sales gets a hit. But turning to online sales has its long-lasting benefits. Many B2B SaaS companies have relatively cheap digital products, so online sales can significantly improve the unit economics. Moreover, it is very likely that the proportion of online sales remains high as the customer behaviour changes.
  • Credit — One should not be blinded by successful sales — it is also crucial to reassess credit risk. Simply put, what proportion of the clients is not likely to pay? The issue is more apparent with physical goods (i.e. gadgets) where the channel owners (such as retailers) might experience financial difficulties and delay or fail with payments. When the financial buffer is already thin, the subscription renewals of digital services might also be delayed or cancelled. Various churn management techniques (such as fee free periods or flexible pricing) might help to keep the clients that might otherwise churn and subscribe at the competitors once the times get better.

Last but not least, it would be useful to review whether there is any financial support offered by the governments. Some grants are also announced by the European Commission. Below are some links that you might find useful for finding government support measures and local grants available:

Finnish support measures: https://www.businessfinland.fi/en/for-finnish-customers/services/funding/disruptive_situations_funding/

Estonian support measures: https://raha.geenius.ee/rubriik/uudis/ulevaade-mis-ettevotetele-riik-kriisilaenu-annab-ja-kuidas-seda-taotleda/

Funding opportunities by the European Commission (by Civitta) and local grant schemes for companies in Estonia, Latvia, Lithuania and Romania: https://civitta.com/financing

Early stage VC firm from Estonia. Early investors in Monese, Bolt, Veriff, Starship and many others. Posting things we find interesting.

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