Our response to the coronavirus: part 2

TL;DR Three weeks into fully remote working, we wanted to give an update on life at Playfair, what we are spending our time doing, and the impact on the VC market and on founders who are looking to raise money.

Life at Playfair

We moved to mandatory remote working for the Playfair team on 13th March and explained our thinking here.

Since then our team has been distributed across London (Joe), Surrey (Henrik), Athens (Alie), Nairobi (Fede), Wiltshire (Simon) and Reading (Chris).

Like most remote teams, we start each day with a video call at 9am and then check in regularly throughout the day over Zoom, Hangouts, WhatsApp, email and the phone.

Much has been written about how to optimise for remote working so I won’t repeat that here. For us, there are times when remote working is actually better than being in the office — conducting research, reviewing documents, writing, etc. — and times when it can be quite frustrating — not being able to meet founders face to face or get in a room to brainstorm ideas and do the more creative aspects of our work.

That said, we feel enormously fortunate that we are able to work remotely.

What are we doing

Existing portfolio companies

Like most funds, we have been spending a lot of time with the founders of our portfolio companies to help them navigate through the current crisis.

Phase 1 has been about maximising runway to ensure survival. Simply put, we need to make sure that they don’t run out of cash. This includes making difficult decisions on redundancies/furloughing and pay cuts.

Phase 2 will be ongoing for many months and the focus is on ensuring that, so far as we can, none of our companies lose momentum. Whereas Phase 1 is about survival, Phase 2 is about optimising for success when this crisis ends. To this end, we are continuously reviewing budgets, financial models and team structure charts to find the right balance between cash preservation and growth. This isn’t easy when it’s not clear when the crisis will end, but we’re doing our best to get the balance right. Time will tell if we get it right.

Our work with founders is both practical and emotional.

From a practical perspective, we’re able to provide a wider perspective of what we are seeing across numerous companies (and what works/doesn’t) and what’s happening in the funding market. This brings useful context.

From an emotional perspective, we are there to help founders navigate some of the most difficult decisions they will face in their businesses. Mostly they know what decisions they need to make, but having somebody they can call on for a sense check or just to chat it through is a key part of our role. Some of the most direct and honest conversations I’ve had with founders have been over the last few weeks as we face this common enemy together.

Given the challenges of a long period of WFH, we’re also reminding all our founders to take time out for self care via the Playfair Wellness Programme.

As VCs, we don’t have any magic answers, but will continue to share perspectives and insights that we think can be helpful and, most importantly of all, continue to show up and be available to our founders at all times.

New investments

At Playfair, we are continuing to do new deals — we have one that closed at the end of last month (£1.5m round alongside 2 other funds and several angels), one that we issued a term sheet on last week, and one that we are taking to IC tomorrow.

Our appetite to do new deals is as strong as ever, but it is likely that we’ll do a few deals less than the 9 we did last year for a few reasons:

• First, we are allocating significantly more time to working with our existing founders. We strongly believe that supporting our founders needs to be our #1 priority
• Second, we are not able to meet founders face-to-face. At seed stage, conviction in a deal=conviction in the founders. Not being able to spend time physically together makes it harder to build the relationship we need to be comfortable writing a cheque. Of course, this works both ways and founders should make sure they can get comfortable with their VC too
• Third, the uncertainty of the funding environment for follow-on rounds means that each deal we do now needs to have sufficient capital for a worst case scenario (at least 18 months runway with no revenue and ideally closer to 24). This can raise challenges with finding a round size and valuation that works for all

Overall, we anticipate the year being a bit lumpy — we’ll likely get a couple of deals closed in the next 6–8 weeks (mostly from founders we met before the lockdown) and then close more deals once the lockdown is lifted. Whilst we do believe that it’s possible to get deals done on a fully remote basis, and I’m confident we’ll prove this out, founders should prepare for a longer process of getting to know each other and building the relationship with their investor.

More broadly, we’re working on some fantastic upcoming events, including our nationwide female founder office hours on 4th June: http://playfaircapital.com/events/

Writing my quarterly update last week, I ended with the following:

Despite the challenges of coronavirus and having to work remotely for an extended period, I am really proud of the way the team has supported each other and strongly believe we can have a very productive and successful 2020.

What’s happening in the market

We note that plenty of funds are pushing out messages that ‘it’s business as usual’, but that’s not the reality in the vast majority of cases.

Here’s what we are seeing:

• Focus on existing companies: like us, most funds have been and continue to focus on their existing portfolio companies. How much time this is taking up will depend on a number of factors including: the size of their portfolio,the stage they invest at, when their companies last raised (i.e. how much cash they have left), and which sectors and geographies they are focused on
• Nervous about LP defaults: funds are concerned about their LPs ability/willingness to fund existing commitments. When a VC raises a fund from LPs, they do not hold that cash in a bank, but have to draw it down from LPs periodically. When economic shocks occur, VCs naturally get nervous that their LPs may not be able to meet their commitments and the response is to invest less capital just in case this situation occurs
• Funds unable to raise new capital: any fund that is looking to raise from LPs will be challenged as investors look to reduce risk and avoid making long term commitments. This will hit new funds and funds that raise more frequently (VCTs/EIS/SEIS funds) the hardest. As a result, there will be less capital available in the market for the next 12–24 months
• Term sheets are being pulled: we have heard of many term sheets being pulled. Since technically a term sheet is not legally binding, and doesn’t commit a fund to do a deal, no law is being broken. However, we generally view this behaviour very dimly. Reputations will be made and broken in these difficult times
• Aggressive terms are back: we’re seeing participating preferred shares and other pro investor terms making a comeback. Like pulling term sheets, we view this dimly and strongly believe that the most successful companies are those where everybody on the cap table stays aligned
• Less deals are happening: as a result of the above, there are less deals being done. Those deals that are happening represent a flight to quality with only the best teams being funded. Unless you have an absolutely stellar team (at pre-seed/seed) or stellar metrics (at A and beyond) it’s going to be tough to get a deal away in the coming months.

The picture isn’t all bad — once we’ve figured out how to end the lockdown and live with coronavirus long-term we see a quick recovery. Equally, there are funds that have secure capital and are investing (including Playfair), but the idea that the whole market is functioning as normal is wide of the mark.

Advice for founders raising

For founders, this is an extremely challenging time to raise funds. Coronavirus has resulted in the biggest economic shock in any of our lifetimes and it’s unclear when things will return to normal. There is no easy fix. However, here are some suggestions to try and ride out the storm:

• Push out your raise to 2021: this may seem like a stupid comment given it’s aimed at founders raising now, but if there is any way you can defer your equity raise by cutting costs or obtaining capital from other sources, do it. You can still engage with investors now, but you need a plan B.
• Prepare for the challenge: raising a round is an exhausting process at the best of times. Right now, you need to bank on doing 3–4x the number of investor meetings to get it closed. Ensure you have a support structure in place at work and at home. It’s emotionally draining. Protect your health.
• Ask the right questions: it’s hard to know from the outside which funds have capital and are investing. Ask effective screening questions when you talk to them. How much are you investing this year in new/follow-on deals? What do you think that number will be next year? What is your process for getting a term sheet given we cannot meet face-to-face? Asking these questions can save you a whole load of time.
• Have a plan for Coronavirus: you need to show that you have thought through how the current economic environment is going to impact your business (positively or negatively) and what steps you can take to ensure that you can raise a successful follow-on round.
• Do NOT sell off Coronavirus: I’ve received a bunch of emails with people telling me that they have an amazing opportunity to capitalise on the current crisis. As a reminder, this is a crisis where people, lots of people, are dying. If your business does benefit from the current economic situation, think carefully about your wording and be sensitive.

To all founders out there raising, good luck and we’re very happy to jump on an introductory video call with you.

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