A Reminder to myself on how to handle the current crisis as a VC

The outbreak and the tremendously fast spread of COVID-19 has over the last couple of months developed into a severe global issue. First and foremost, the disease turned into a pandemic and a worldwide health crisis. This, in turn, resulted in an economic downturn, and suddenly members of the Venture Capital ecosystem are not only publishing content on how the crisis is affecting Start-ups, but telling Founders how to handle the crisis. While reading those articles and posts, I realized that the main focus lies on giving founders helpful advice on how to handle the crisis within their companies. Looking at all this well-meant advice, I reflected on, why we as investors, take it upon ourselves to have the patent remedy for success during this crisis? Together with my team, I have spent the last weeks talking to founders, co-investors and other investment professionals in the VC space, noticing that a lot of investors seem to fear the consequences of the current crisis. With the fear in the back of one’s minds to lose some of the investments, investors might take unexpected actions, which are, in turn, putting additional pressure on founders. I consider fear rather unhealthy, but at specific points, I am afraid of the effects of the COVID19-recession on all of us, including myself.

I figured that I need some tools to keep calm, relax and at all times stay realistic, even optimistic to a certain degree. Therefore, I decided to write down some thoughts, my mantra if you want to call it so, that might serve as a helpful guide for Investment Managers out there in this uncertain situation.

1) Don’t panic

For the past couple of weeks, I bet you have received multiple calls from founders every day delivering bad news. You might see your first companies and therefore your invested money disappear. It is hard not losing your confidence in such a situation, but keep in mind that you invested in very smart founders, founders who usually have more skin in the game than anybody else and most importantly founders who need your help to navigate successfully through these tough times. Panicking and putting more pressure than necessary on the companies doesn’t help anybody. When looking at the development of your portfolio companies, you might first try to identify and tackle the most immediate threats, but simultaneously you need to help founders seize the opportunities that are coming alongside every recession. You must not forget a crucial part of every VCs job description is being optimistic.

2) Mentally put yourself in the place of founders

Empathy is the key to successful communication in particular in times of a crisis. Therefore, it is more important than ever to be aware of the different perspectives towards a situation. As Investment Managers, we are used to having high-level discussions centered around strategic recommendations and how to implement them, but usually, we’re not the guys doing the day to day groundwork. Imagine having 20,50,150 employees you are responsible for, immediately switching them to a remote work situation and probably letting some of them go. At the same time, you need to keep up the spirit, the productivity and manage the cash flows. I guess we can all agree on the fact that those are definitely a handful of challenging tasks. Any lack of attention could lead to ripple effects, putting the company at risk. At the same time founders strive to fulfill their investors requirements, like doing risk assessments, answering Q&As and talking to all of them mostly at the same time. All of that is important and necessary, but in many cases, investors consider their requests the most pressing ones, whereas to a founder it’s just one of many issues they have to face. Keeping all that in mind while talking to or approaching your founders often helps to keep perspective and be realistic.

3) Listen to founders — in the end they know their company and their sector best

Keep in mind that you invested first and foremost in the teams that are experts in their field and that not only have the ability to scale but also to preserve their company. Thus, it is so important to listen to them carefully explain the direct impact of this crisis on their business as they are the ones experiencing it first-hand. Every business model is affected in a different way and there are a variety of different actions needed to mitigate the effects of a recession. In any case, I believe that general measurements like cutting 25% of the costs just because everyone does, doesn’t acknowledge the uniqueness of every business and the impact of the crisis. Assuming a 50% revenue drop only because it’s considered to be conservative doesn’t take into account the business model and the product. By forcing companies into such measures, you can do more damage than good. In fact, slowing the pace down too much could lead to a “never-grow-again” situation. Therefore, the real challenge is not only to reduce cash burn but also to balance between the sudden risk and possible opportunities lying ahead. Offer your advice on the matters you know best. Set a goal for the cash run rate, bring in your unique knowledge of the VC market, talk to other funds and figure out who is still willing to invest or might start investing again. Be an enabler to your founders. It’ll help them to focus on the necessary things, which are essential in stressful circumstances.

4) Try to be helpful, be a real partner to founders

Keeping the above-mentioned points in mind, the conclusion can only be, to be as helpful as possible. Most of the time, putting pressure on founders has little positive effect and won’t help to solve pressing issues. So instead work together with your founders to tackle the problems that are arising. Investors always claim to be hands-on and now is the time to act on that statement and get our hands dirty. As many investors say, investing is a little bit like a marriage: supporting each other in good but especially in bad times. Leverage your network, help with the liquidity planning, develop a fundraising strategy, help with the communication strategy. Consider yourself a true partner, not only an investor. It is easy to be a good partner in good times but the big challenge lies in maintain that strong and good partnership during a crisis. If a partnership can withstand this, it is resilient and will be stronger in the future. Protecting your founders means protecting your investment and increasing the chance to successfully maneuver through the crisis.

5) Be honest

Don’t fool around and tell founders you are still investing in the usual manner. It might be easier to act as if the current crisis is not affecting your investment behaviour, whereas we all know that in the most cases, this is not true. Anyway, I would recommend you to be honest, as this will pay back in the future. Everyone will understand if you’re not able or willing to invest. Especially with regards to your current portfolio companies, you should be honest and totally transparent about your capacities and willingness to invest further. Managing expectations is key. I observe investors stretching processes, by playing with founders in order not to lose the deal, without actually having the capacity to invest. In times where many companies are fighting for their survival, I consider this kind of behaviour highly unethical. Jump over your shadow and be honest.

In a nutshell, in these highly challenging times, you can prove that you are the right partner in crime for your founders. This crisis will pass by, and no matter in which way, it will affect founders and their companies and what will undoubtedly remain in their memory is who stood by their side during the rough times.