Below is a letter we shared with our portfolio companies with tactical ways to prepare for the worst and hope for the best with respect to COVID19. Other startups may find this useful too.
Dear HPVP Portfolio Leaders,
With COVID19 an increasing reality both for public health and business, we know that each of you is considering how best to lead your company in protecting you employees, families and customers and ensuring resilience of your venture through a potential downturn and into a recovery.
Our portfolio company teams vary significantly in experience level. For some of you, this shock may not be the first you have weathered. It is for others. Regardless, each of us benefits from a thoughtful and planful approach to the potential challenges ahead. Below is a set of resources and considerations in charting (1) how to help protect the communities you lead and (2) how to protect your company to weather what may be ahead. While we all hope for the best, we must also plan for the downside. We will be in touch with you individually to see how we can help.
(1) Protecting your community, people and theirs:
There is a growing chorus of questions related to employee and family travel, professional and social gatherings and proper hygiene in the face of COVID19.
Remember that in times of uncertainty, your actions and leadership are even more closely watched and mimicked by employees than in normal times. Also consider that while many startup employees appear “young and healthy”, employees may have conditions that they keep private, and “healthy” employees may otherwise come in contact with loved ones, community members and customers who are at higher risk from the virus.
We are not doctors, and most of you aren’t either, so we recommend following the guidance of public resources on what you should do. There are resources available from the CDC on down to municipal government; HPVP has been most attentive to the City of Chicago’s recommendations. We outline these in some detail with additional thoughts on events and domestic travel at the end of this email. Since you’ve heard much of it before, we’ll now shift focus to your companies.
(2) Protecting your company:
Sequoia Capital published a letter they sent to their companies last week. The letter outlined how startups can anticipate and weather the effects of potential drop in demand, supply chain disruption and cancelled meetings and events. We highly recommend reading their letter and offer additional thoughts below:
Cash is king:
Almost all of our companies burn cash in favor of growth. When met with strong economic headwinds, the growth per cash burn ratio will decline (even to zero). Meanwhile the cost of that capital you are burning goes way up – it gets harder for startups to raise capital. While VCs have raised historic amounts of capital in recent years, we may see more of it to stay on the sidelines as VCs’ own fundraising cycles lengthen. In short, if you planned on raising capital this year out of need, assume that it may be difficult to do so.
If you can’t count on fundraising or revenue for cash, the only thing left is expenses. We are not recommending our companies cut yet – pending learning more about COVID19’s impact in the next few months – but delaying hiring except for the most clear ROI cases is prudent (for example a project manager to run a large signed contract rollout versus just another sales person).
We should all be watching closely over the next few months with regard to further hiring or cuts pending feedback from sales in Q1 and early Q2.
If this sustains, it will affect everyone:
There are always arguments about what industries and business models will be affected the most in an economic shock. Certainly there are some that will be affected more by COVID19 than others (hospitality, travel, etc), but our position is that all startups will be affected. Even companies that don’t travel for sales – e-commerce, inside sales, marketplaces – are all likely to be impacted. In a contractive environment, everyone contracts at one level or another.
Make sure your customers are very happy:
In tough times, resilience and stability – after extending runway – comes from keeping customers happy. Delaying price increases, allowing contract extensions or downsizing contracts if customers themselves are downsizing can go a long way in saving a customer that might otherwise be lost. Remember, they are facing the same headwinds you are.
Exercise flexibility in your teams to ensure continuity:
Seattle has seen large tech companies (MSFT, GOOG, FB, etc) ask or require employees to work from home. In several cases, these actions followed the diagnosis of an employee. Other examples were purely proactive to reduce risk of spread – actions that are, in fact, in advance of CDC and local health departments’ recommendations for only high risk individuals to remain home. This shows us that an explicit or societally implicit expectation that companies shift to remote work could happen at any time or anywhere. We know of several companies “practicing” remote work by rotating 20% of their team each day to work from home over a week. This allows them to exercise “remote” muscles and ensure adequate tools and processes at home should they be needed.
Perhaps the biggest need for team flexibility relates to employees managing childcare if schools selectively or broadly close. Reduced or adjusted work hours may be necessary to accommodate school closures amongst your employee base. It would be a good idea to recommend that your employees begin to plan for this contingency and for them to know you have their back to reduce anxiety.
Make no little plans:
Our most tangible recommendation is to put a plan together over the next few days to address how you are approaching COVID19 with your team, customers and 2020 plan. A good plan would answer these simple questions:
- What have you communicated to your employees, and how are you preparing them for a potential broad isolation scenario?
- What actions are you taking now with respect to previously planned hiring?
- What signals are you closely tracking over the next 4 to 8 weeks as leading indicators of demand softness?
- What actions would you take in 8 weeks based on different outcomes of those leading indicators?
- How much runway do you have now… and assuming no growth plus aggressive cost management in Q2?
You will probably want to share this plan with your board or perhaps have a board call; you never know where you might hear a good idea.
Explicit recommendations include:
- Practice exceptional hygiene and social distancing: stay home when sick, wash hands frequently, and avoid handshakes
- International travelers from Level 3 advisory countries (China, Iran, Italy, South Korea per the CDC) should self-quarantine at home for 14 days; International travelers from Level 2 advisory countries (Japan per the CDC) are not yet advised to self-quarantine but should monitor their health closely
What is less explicit in guidance from most public sources is what to do about domestic travel and gatherings/events. Of course, this is a big question for many of you who travel for sales and either hold or attend conferences. We are seeing more and more public events and conferences be cancelled. This began with large international conferences, then large ones hosted in the US and now seems to be expanding to more regional conferences in the US. It seems prudent at this point not to hold large events. Whether that is justified from a public health perspective is not ours to say, but expect that attendance will wane until there is more uncertainty about COVID19’s spread. Better to do things virtually. Likewise, with many conferences cancelled and many customer companies limiting visitor access, there are increasingly fewer reasons to travel domestically. A final policy on domestic travel is yours to make. At this point, HPVP has bagged all non-essential travel. You can see what other tech companies are doing here.