Venture capital returns
We came across these two good articles. Definately worth to read you want to understand venture capital:
Risk Exploding Problem With Venture Capital
and
The Corona issue – what to think about it ?
Friday Mach 6, 2020
To: Gorilla Capital portfolio companies
From: Risto Rautakorpi
The Corona issue – what to think about it
Note – I focus entirely on the business implications, personal health & safety is of course #1 priority and I leave those matters for the Healthcare professionals to advise on.
I rather cry wolf than regret later, and as “only the Paranoid survives”, I’m OK to be the paranoid.
No-one knows yet what the end outcome of the Corona issue will be. But already now it has caused a visible disturbance on businesses and economies worldwide and the ripple effects are yet to be seen. Some businesses are affected more than others, but very few will be completely immune. For some (like face mask producers or remote working solutions) this can create a massive windfall.
Your business will be affected as well. In what way, when and how severely, depends. That’s what you should now form a view on, and do mitigation accordingly.
A likely scenario for anyone selling to corporations: In the 1st wave, they focus on their people risks: they cancel attending events, making business trips, they ask people to work from home etc. In the 2nd wave they do the immediate adjustments to their own business (such as airline industry), in the 3rd wave they start calculating the cost of all that, and how to balance the effect. They will try to assess what their customers do and how that will affect their own business. The 1st thing they’ll do is step on the brakes and will do only the mandatory until the dust has settled – which means anything non-mandatory will be postponed. They will try to manage costs, in anticipation of their revenues declining. This may mean layoffs, freezing any new costs (such as development projects) etc. They will have to add new issues on their agenda, changing the priorities. At this point you will start feeling the heat.
These “never seen before” crisis are part of the business cycles. I’m older than any of you so I have experienced a few (and their direct consequences) myself: oil crisis 1973, Chernobyl 1986 (this was particularly scary in Finland, due to the typical wind directions), Iraqi war and 2nd oil crisis 1990, dot com crash 2000, Financial crisis 2008. Not to mention the next tier – SARS, Thailand Tsunami etc.
It’s not a bug, it’s a feature. If you sail across the Atlantic you’re likely to get into at least one big storm. You know that from the start so you prepare accordingly. And when the weather map turns dark, you get ready: you take down sails, close all holes, tie everything down, eat and rest while you still can, make raingear readily available. When the storm hits you, you are prepared. Then you do what you must to stay afloat, and just wait. Even the worst storms end one day, the sun is shining again and smooth sailing can continue.
But while sailing after is no different from sailing before, business after a crisis is never quite the same as before. Oil crisis triggered the need to reduce dependency on oil, Financial Crisis tightened regulation of financial markets etc. The mankind is trying take measures that “this could never happen again” (rather successfully, as the next major crisis is always a “never seen before” kind). Those changes create a ton of new business opportunities.
The Corona situation – once over and back to normal - will trigger such changes as well. What exactly, we all can make educated guesses about. They too will create opportunities.
Profits are made during the high season. Strategic moves are made during the low season.
My call to action to all of you:
- The eventual consequences of Corona will affect all of you (and us, as a result). Meaning you all need to take it on your agenda.
- You should analyse your situation (and that of your key customers), play with some scenarios and form a view on what you assume the implications to your business to be
- What is it you can and should do to mitigate the negative effects. Create an action plan on what to do if the storm hits you, and what is the indicator telling you the storm is on
- What new opportunities will this create, once the storm is over. How could you best benefit of it?
I sincerely hope none of this is ultimately needed and the world goes back to normal soon. But it would be irresponsible to just count on being lucky. Hope for the best, prepare for the worst!
Risto
Getting Funding is NOT a Strategy
Money is always a consequence, not the root cause. You work – you get paid. You sell – customer pays. You roll the dice and get lucky – you get rich. You have a business (plan) that works – you get funding.
But getting funding is not the end goal, not even for a startup. The end goal is to be able to pay all that funding back, and some more. To reach that you need to have a business that works. For getting there, you need the right strategy. The strategy should be all about your business: who is your customer, what is your offering, how you plan to win etc.
The journey from where you are today to where you need to be one day is typically so long that you may need to top up some fuel on the way. Funding is your fuel, helping you to get where you need to go. But it’s just a means to an end, not the reason your startup exists and definitely not your Northern Star. It should not be the driver for your thinking and activities, do not let “what do I need to do to get funded” to mislead you.
When is the best time to do the exit?
When the buyer is willing to buy you at reasonable terms. The most critical element of this is the motivation of the buyer, and that is out of your control. The “open to buy” window is created when their strategy shows a need they need to address and do it yourself doesn’t really cut it. That’s when they start looking, and you need to make sure you show in their radar screen when they do. And that is the part which you CAN control. Sometimes this happens earlier than you would have liked, sometimes later. Timing is not in your hands. Accept it, and act accordingly.
When should I start thinking about & preparing for the Exit?
The best time is when you start the company. The second best time is now. But the preparation does not mean hiring an advisor etc, it is about doing the groundwork that will increase the probability of an exit, when the time for that is right.
Are you the only VC type investor who has such a strategy?
No, but this is still more of an “exception” rather than “the norm”. Some investors who have a similar kind of basic philosophy (model is more of a “scalable Angel” rather than “VC”)
https://www.kimaventures.com/ (the only European on this list)
http://rightsidecapital.com/ (we owe a lot to these guys for setting up a role model we have taken full advantage of. Big thanks to Kevin & al for the inspiration and openly sharing their thinking)
https://svangel.com/ (building on the heritage of the original SuperAngel Ron Conway, they have the longest track record to demonstrate the strategy works)
https://500.co/ (the most vocal on this list. For them investing is just one of the things they do)
There certainly are more but most investors with this strategy tend to prefer a low public profile, they focus on their business rather than PR.