As scale-up entrepreneurs grapple with uncertainties ahead, issues of accessing capital are particularly top of mind. Endeavor spoke with four operators-turned-investors — Reid Hoffman (Greylock), Martin Escobari (General Atlantic), Nico Szekasy (Kaszek Ventures), and Shailesh Rao (former TPG Growth) — to discuss best practices and actionable tips on managing through this crisis.
Reid, Martin, Nico, and Shailesh have been at the helm of companies through hypergrowth, IPOs, and successful acquisitions. They have also had to lead through two recessions, market downturns, and fundraising crunches.
They joined Endeavor for a series of strategy sessions on leading through crisis — here’s what they had to say to Endeavor Entrepreneurs on how to navigate fundraising in a fundamentally different world.
Shore up your balance sheet.
In today’s environment, cash is king. Some companies were lucky enough to have closed their rounds in January or February right before the crisis hit. But many were not so lucky. It’s going to be significantly harder to fundraise over the next quarters, so getting a handle on cash flow and extending runway is key.
Secure 18 months of runway. Change your expense structure to buy that runway. Go through each line item – everything is on the table, says Nico, who co-founded MercadoLibre (NASDAQ: MELI) and now leads the largest VC firm in Latin America. For example, renegotiate your contracts, ask your customers to pay upfront if they are in a position to do so, cut your discretionary marketing spend, get creative on how you compensate your senior management team (e.g. pay in equity rather than salary), and turn fixed costs into variable costs.
Develop your (working) hypothesis on the duration of this downturn and build a model for how it will impact your business. Reid — co-founder of LinkedIn, partner at Greylock, and author of Blitzscaling — advises that you should figure out how you can get the earliest monitoring signals to test the model’s accuracy. For example, check in with customers and ask them “what do you see happening from now through August, and then beyond August?” Leverage these insights to refine your model and laser into where your revenue could falter so that you can maneuver accordingly. Maneuvering early is an intense differential survival mechanism vs. maneuvering late. “Blitzscaling” is relative — while the speed coefficient is different in today’s environment, what matters is that you move quickly and decisively compared to your competitors.
When you get to the other side of this crisis, you’ll be much stronger for having honed this cost discipline, reflected Shailesh, former Partner at TPG Growth, head of Twitter’s international operations, and part of the team that launched Google Maps worldwide. In looking at every single line item and managing the business in its totality, you’ll develop an enduring executional discipline and attention to detail that hypergrowth-oriented companies sometimes lose sight of. This is an important muscle to develop and a silver lining to take into the future beyond these times.
Structure a financing with your existing investors.
The best place to turn to for an injection of capital is your existing investors.
Start the conversation early. If you think you’ll need internal capital, start that conversation sooner rather than later. Investors are figuring out how much liquidity they have in their funds and which companies to support, and these conversations are taking much longer than usual. Build in enough time for these negotiations.
Frame the urgency and importance of the round from the perspective of your investors’ interest. Reid shared that investors might say ‘We’d rather wait till the month before your cash runs out’ since this preserves their optionality and will net them a better deal. But reinforce to your investors that it’s important to keep your team motivated and to shore up the business now. Remind them that this is not a zero sum game and both of you can become winners when this succeeds. As such, it’s important to work together to play for the upside, rather than protect the downside. Nico reinforced that the venture industry is different from many other industries in that the relationships are 10+ year relationships — both investors and entrepreneurs should be aligned on what is good for everyone in the long-term.
At the same time, make sure you optimize for runway and don’t lose a deal because of price. Whether you open up your last round on the same terms, pursue a convertible note, or raise a new priced round — take the money and don’t worry as much about valuation. Martin, Co-President of General Atlantic, head of the fund’s investment committee, and former founder of Brazil’s #1 e-commerce company, emphasized that cash in hand is hugely valuable — a dollar on your balance sheet is worth a tremendous amount when customer acquisition costs are rock bottom and consumers are flocking online. “Just make sure you’re doubling down with a group of investors who have the same values as you and whom you trust,” he reflected.
Prepare your fundraising strategy for when the market will be ready to make new investments
For entrepreneurs that did not raise right before the crisis hit, how should they think about when the market will be ready to make new investments? What signals can these entrepreneurs monitor to make sure they’re one of the first companies to go back out and engage with investors when they’re open for business again?
Don’t start running a new formal fundraising process any earlier than August or September. Reid shared that entering into a financing relationship with an investor is a long-term commitment somewhat like a marriage, so you could start going on some (online) dates now … just don’t try to get any commitments or “walk down the aisle.” Build the theory of the case with prospective investors — acknowledge they are super busy right now, but let them know you’d like to start giving them some familiarity about your business before you start talking in earnest. And let them know that when you set out to achieve X, you’re going to go out and do X! That makes the process in the fall a lot easier because you’ve started to build the relationship and trust. And by September, private markets could reopen — they will likely open more expensive, selective, and difficult, but they will have stabilized a bit and starting to look at new opportunities. Martin advised that if you can delay fundraising, you’re likely going to see a better fundraising environment in 18 months.
Start with investors you already started building relationships with before the crisis hit. It is tough for investors to sign a check for a brand new founder they haven’t physically spent time with. Investors are wrestling with how to execute the business of investing entirely online. Nico and Shailesh emphasized that earlier-stage investors will more quickly develop comfort investing in entrepreneurs they’ve only met virtually. Growth-stage investors will be slower to adjust to this potential new reality.
All of our founders-turned-funders reinforced that entrepreneurship is a true testament to persistence, grit, and adaptability. As Reid noted, “If it’s the year of the tsunami, this is also the time for the entrepreneurial fleet.” Entrepreneurs able to adapt and innovate will shape the way we rebuild on the other side of this crisis.