What Enterprise VCs Are Telling Their Portfolio Right Now

Just like the rest of us, enterprise startups are in a strange spot in these strange times — some are accelerating, while others are just trying to stay afloat. As an early-stage founder, how should you think about your next move if you’re in either situation?

We sat down with Lan Xuezhao and Jodi Sherman Jahic, two successful early-stage enterprise investors, during All Raise’s virtual events series, to hear their takes on fundraising, survival tactics, and the silver lining for entrepreneurs who can endure.

Lan Xuezhao started Basis Set Ventures, an early-stage fund that invests in companies changing the future of work, after spending formative years at Dropbox and McKinsey. Wireless tech veteran Jodi Sherman Jahic has been investing for over 20 years, and started Aligned Partners to bring her expertise in enterprise to early-stage founders.

Here’s a breakdown of Lan and Jodi’s conversation about what’s on the horizon for enterprise startups.

1. How are VCs feeling about enterprise startups right now?

Lan: Two things:

1. Most VCs are spending 80–90% of their time making sure their existing portfolio companies are okay.
2. They’re also trying to plan out their investments for the next year, so it’s a great time for VCs to continue deploying capital.

Jodi: We’re in an interesting moment because we’ve had a rising bull market for so long and the venture industry has seen so much expansion.

So a weird side effect of COVID-19 is that many investors have never seen this kind of environment before. People are having a variety of psychological reactions to what’s going on — ranging from fear to mastery.

If you’re a founder, that means you need to understand the sentiment of your investors, and their customers as well. People are going to put on their oxygen masks first, so you want to know what your investors’ priorities are.

2. What advice would you give to enterprise founders who are seeking new capital?

Lan: Jodi’s point on understanding your investor sentiment is really true. If you need cash, go back to your existing investors. If that doesn’t work, go to investors you’ve met before but haven’t invested in you yet.

Jodi: Well, this is my third major downturn.

In 2001 and 2009, founders learned to ask a couple of really key questions that I think founders are going to learn to ask again now. And I have to admit, I haven’t heard founders ask these questions to investors in a long time because they haven’t been relevant.

They are:

• Where in your fund are you?
• When did you raise your last fund?
• How much of it has been deployed?
• When are you planning on raising your next round?

Every VC is going to say they’re still making investments. No one is going to admit that they’re out of the market unless they explicitly announced that they’re not raising another fund.

“The onus is really on you to ask the key questions that tease out whether people really are investing.”

The challenge now is around the perception of risk. Nobody knows how to price a term sheet, and that’s just as bad for a founder to have that price be too high as it is to be too low.

So I think you’re going to see people sit on their hands for a couple months until pricing gets more certain. Right now, if you have the luxury of not needing capital for at least a few months, lay low. Stress-test your plan, hibernate, spend time with your customers, and build relationships with investors — knowing it’s going to take longer.

3. What COVID-19 trends are you seeing in enterprise right now?

Jodi: Here are a few:

• I was using Zoom before, but certainly, my mom wasn’t using it. That’s not specifically an enterprise trend though.
• There’s an increased need for security, and it’s shifted toward identification and ease of use.
• Telemedicine has gotten huge. This is going to stay.
• Personal points of contact, like from one teammate to another, are going to grow, even in enterprise.

Lan: A couple more:

• Our supply chain and global trade are completely broken, which is why we’re not getting enough PPE. We’ll have to bring more manufacturing domestically, or we’re going to have to relax certifications for certain products. There are going to be a lot of opportunities for startups that tackle this area.
• Automation and AI: You want fewer humans in the loop because it’s cheaper and safer. Robotics companies are taking off now.
• Antiquated industries are starting to get traction: We’re talking about farms, manufacturing, logistics, construction, and real estate. These industries have traditionally been harder to disrupt, just given the incumbents and legacy systems. Now, they have no choice.
• Restaurant workers and health care providers will now get the attention they need. We have to give them the tools and attention they need to do their jobs.

Jodi: All of that is true. We’re also seeing highly divergent adoption rates within our enterprise portfolio. Some companies are moving much faster as a result of the current market, while some are moving much slower.

For instance, we have a portfolio company that does IoT networks for critical infrastructure. Their RFPs have gone through the roof because, of course, you want to have non-human intervention. At the same time, selling to customers is taking longer, even for things that have a higher value proposition in the current market. People are being careful with their money.

There’s also good news embedded in the slowness. I know it doesn’t sound like it, but what used to be “growth at all costs” as a trend has pulled back a little.

That’s good for early-stage founders. Pushing on the gas pedal to accelerate growth before you have a full understanding of your customers and how your solution fits is a great way to burn money.

“Now you have the luxury of time to actually discover what your customers need. You can slow your burn without fearing that the market is going to get way ahead. It’s not.”

4. How can enterprise founders extend their runway right now?

Jodi: We ask all of our portfolio companies to do a stress-test with the following parameters. What would it look like if you had…

• Zero new sales until at least Q4 of this year.
• Churn of either 2x the highest you’ve ever seen, or 30 percent. So assume just outright loss of that revenue with no new sales coming in.
• A situation where the time it takes to collect payments is twice as long.

You should know how long your money will last under each of those scenarios. For some of our companies that can’t pass the stress-test, we also ask them to create hibernation plans.

“You watch and wait. And then you live to fight another day. A lot of people, a lot of your competitors, won’t.”

This is what I’ve told all of my portfolio companies. I’m not giving you anything that’s different than what I tell my own companies, my own kids.

Lan: That’s great. We ask every company to plan for at least maybe 18 months of runway.

As a founder, right now you need to map out whether you have too much fat — and then cut. The question is, “Should you cut muscle or should you cut bone?”

It depends on your business and what your customer churn looks like. If your churn is high, cut to the bone, hibernate, and maybe take some time off. Then come back.

“I think the silver lining is that this is advice for the companies who are struggling. So for companies that have enough cash for the next two years, it’s a great time to gain market share.”

Also, some assets are cheap in this market. Are there companies you can acquire and get more talent? Or can you finally buy the right domain names? Or other things you normally wouldn’t be able to get?

If you have cash and an opportunity, use it.

Jodi: Lan, how do you help companies know if they’re cutting fat or bone?

Lan: It depends on the company and business model.

We have some companies that are growing faster in this environment, so they need people to grow. If a company sells to enterprise customers with multi-year contracts, their growth will still happen, it’s just slower. So the cut doesn’t have to be as deep.

If a company can expand to a new market, acquisition costs will be lower, so it’s actually the best time to do that. In a few scenarios, our companies are making riskier moves while others are hibernating. It’s a case-by-case basis.

5. What advice do you wish enterprise founders knew right now?

Jodi: I’ve seen a lot of founders make communication mistakes during these hard times. They’ll just share the facts and not all the surrounding decision factors, which is actually a bigger mistake than not sharing the facts.

Right now, everyone’s scared. People are scared for their own health, their parent’s health, the economy, their jobs. They’re worried about your company.

Give your employees and investors straight talk about how you’re going to make your decisions. That will create a stronger sense of team and better outcomes for your business.

If you need a good example of this, look at how Andrew Cuomo communicates. He’s an amazing communicator because he starts with the why, and then what he’s going to do about it.

He says things like:

• “My mother is not expendable, and your mother is not expendable.”
• “We’re all feeling cabin fever, and this is how we’re addressing it.”
• “We’re going to save every life, and this is how we’re going to do it.”

“If you start with why you’re making your decision and then wrap the facts around it, you’re going to create much more loyalty from your team and investors.”

You have to let go. Acknowledge the vulnerability, the humanity of this moment. You don’t have to look tough.

Find your core message.

• For some companies, it’s that they want to keep as many people on their health care plan as they can. And so they’re going to cut every salary to do that.
• For others, it’s about serving customers like never before.
• And for others, it’s about prioritizing staff flexibility more than anything else.

Those are all valid, you just have to decide what it is.

6. What are the silver linings coming out of this crisis, particularly for enterprise startups?

Lan: This is when underdogs surface and become market leaders.

Industries don’t get disrupted from the top, they get disrupted from the bottom. If you can survive COVID-19, you can become a market leader. A lot of companies were started in difficult times like this.

I grew up with no resources, and a lot of our founders grew up in the same situation.

“We’ve been preparing for this our entire life.”

Your disadvantages start to become your advantages. Founders who grew up with ample resources are going to have a harder time. Plan for the worst, but also look for opportunities.

Jodi: The scrappy underdog is really the one that wins. Once you’ve made your peace with that fact, you can look up. You can say, “These are the parameters of my survivability. Now, what can I do with that?”

It’s actually kind of fun and interesting when the scrappiness comes out.

The ones that are really in trouble aren’t the early-stage startups — they’re the ones with a $2 million-a-month burn rate. As an early-stage startup, you’re not in that pain. You have more control over your destiny.

“The real questions are, ‘What is within your control? What can you do right now?’ And that’s fun — a world where actual value creation matters. I think most founders would agree.”