To view the original post by Eric Benhamou, please click here.
One of our LPs wisely reminded me today: “Shock Happens.” He is right. In October 1987, the market dropped 25% in a single day. During the dot com bust, in 2000, market caps of billions of dollars evaporated to nothing in less than a week. After 9/11, the skies saw fewer planes in flight than we have today. And, in 2008, the demise of the Lehman Brothers heralded the burst of the biggest asset bubble since the Great Depression. Today, as COVID-19 puts millions of people in Silicon Valley, and hundreds of millions around the world, on lockdown, we’ve seen the way we work and interact as a society completely upended, and a familiar panic now roils the markets. Yet, this pandemic is no nuclear winter. It will not extend for decades, or even years. China has already made it to the other side. And we will get there too. It may take us a few months, perhaps quarters. The question we ask ourselves at BGV is: what should we do to make sure that we, and all of our portfolio companies, make it to the other side?
My partners and I are active investors. We do not simply place bets and hope for the best. In good times, we speak with our entrepreneurs every day. In bad times, we double down. We communicate more frequently, we do so with even greater focus and intensity, and we make sure they benefit from the lessons we learned from our experiences with earlier shocks. This advice must go beyond the generic and lame “stay safe and spend every dollar like it was your last” or “cut your burn and trim headcount where necessary.” I remember how I felt, as CEO, when my board members were telling me: “making more money is better than making less money…” The truth is, we do not operate in a “stay safe” space, and we never did. We are in the business of taking calculated risks, mitigating these risks by all possible means, and powering through them with grit and commitment.
We must, in first order, make a clear priority choice: getting our existing portfolio companies to the other side is more critical than looking out for the next cheap investment. This outlook must be reflected in how we allocate our time. Value preservation and survival are primary; chasing the next shiny new deal is not.
In second order, we must have clarity in how we triage our companies:
● Companies like Zoom and Netflix are enjoying incredible tailwind acceleration at the moment. While we don’t own Zoom or Netflix, we own companies who benefit from the same dynamics (tele-health, healthcare logistics, and food deliveries, for example). A focus on helping their customers in this time should be of utmost importance, as their actions today will build loyalty and pay dividends once this crisis has passed. These companies are well positioned to succeed, and require less hand holding from us. Good for them.
● Other businesses face headwinds. They are more like airlines and cruise companies that must quickly shrink back to a skeleton crew, figure out how much cash they have in the bank, and internalize the fact that this will have to last them for 6 months minimum. The rest is a question of cold arithmetic. Active investors like us must roll up their sleeves and help these founders navigate their way back to dry land. Taking early and decisive action is far better than a slow death by a thousand cuts.
● In between these two extremes, other portfolio companies may find new opportunities to capitalize on the deep changes in workflow that we must make today. We are learning what social distancing means. We are figuring out ways to be more productive remotely. Digital marketing and selling take on added significance. These companies must define their relevance to the post COVID-19 world and fit into a pandemics-prone future.
In times like these, the outlook of many entrepreneurs often resembles the early days when the founders were operating out of a garage, before the company got its first seed funding. We remember, and acknowledge, that some of the greatest technology companies of today, such as Microsoft, Amazon, Adobe and HP were forged in the deep downturns of yesterday. Many more, of course, never made it through.
Finally, we must help some of our companies identify creative inorganic combinations. The goal is to to gain critical mass, reduce their cash burn to zero, gain full control of their future and get to dry land. Few investors have the industry insights necessary to identify these options, let alone the skills to execute these combinations. They require transaction engineering skills, and may need to brokered without the help of expensive bankers. Yet, these opportunities exist and are part of the playbook of an active VC. Above all, they must make sound strategic sense in both the short and long term.
A closing thought: all-hands on deck means all partners, general partners and limited partners. Getting everyone safely to the other side may require incremental capital, accelerated capital, from multiple sources: VC partnerships, banks, co-investing LPs, founders, governments. One size does not fit all. The only common trait is a determination to get to the other side, together, and survive.
