Despite a worldwide pandemic, entrepreneurs and investors continue the quest to uncover emerging market drivers and opportunities. Companies that have a significant demand drivers associated with Covid-19 are raising capital fairly quickly and efficiently in large amounts. Technology also remains an area of continued interest with a high-quality of deal flow.
Angel investors are increasingly continuing to fund existing portfolio companies (at attractive valuations for the company and the investors). Such investments boost those balance sheets and provide an extended runway to pivot and meet the expectations of a volatile marketplace.
Some investment groups are pulling back, taking longer to evaluate potential investments or just seeing their deal flow pipelines dry up. At Keiretsu Forum, we have funded nearly all of the companies this year that have participated in our (now virtual) online investment forum, with a continuous flow of due diligence packages completed or syndicated new deals successfully closed.
Sometimes however, change can be for the better. A silver lining is we expect to see leaner, more efficient and more focused companies ready to thrive and take advantage of a market recovery. Our outlook for 2020 remains positive for our portfolio of technology companies, reflected by our tagline ‘Survive to Thrive’.
We strongly believe there will be a V-shaped recovery for 85% of the economy, already there are favorable market indicators such as a stabilized and appreciating stock market. Available capital and liquidity also remains abundant.
If considering funding or in process now, here are seven steps early stage companies can take to become more attractive to angel investors:
1. Strengthen the balance sheet by closing outstanding commitments and explore venture debt and lines of credit
Companies should exhaust every opportunity to generate additional working cash flow without taking on additional liabilities. One way is to improve lines of credit or venture debt into expanded cash flow. Likewise, companies with inventory will want to increase stock, even though there may be volatility in inventory drawdowns and/or potential supply chain challenges. To do such, close any existing sales or partnerships because they can provide additional flexibility and cash where applicable. For example, Palarum offers a product for hospitals that prevents falls and just completed key pilot studies. It recently concluded a three-year purchase LOI from a key customer, which it leveraged to acquire additional financing that covered the cost of the product roll out.
2. Negotiate with vendors/landlords/others to reduce or defer costs
On average our portfolio companies are negotiating reduced rates cut at nearly 50%. If no reduction is available, look to get two or three free months deferred to the end of the lease. You may be surprised at how easy it can be to negotiate favorable terms. Replacing a tenant is a high cost landlords want to avoid for otherwise high-quality growing companies.
3. Immediately variabilize costs/shift to equity-based compensation where it makes sense
A great way to reduce cash burn is to increase option pools and/or create more equity based incentive compensation in the form of stock options available to executive team members. Less cash out = less cash burned! Equity based compensation is tied to milestones and is considered a variable cost.
4. Slow down payables, including maximizing payment schedules against terms and conditions
This is another case of Ask and Ye Shall Receive. Negotiate longer payment terms, and/or purchase upfront or in bulk, which drive additional substantial price decreases and savings as much as 50%.
5. Take swift action to cut costs and reduce burn rates – earlier decisions are rarely regretted
Where are you focusing your marketing spend? Where are you focusing your business development efforts? Is that spend really realistic going forward? Is engineering fully focused where it should be? If not, cut back as much of that discretionary spending to further reduce burn rate. Look at ways you can be a more efficient customer-direct focused organization versus a market-focused one.
6. Focus on revenue generation, reorder priorities, re-plan the roadmap to emphasize top line
Maximize the top line and get healthy around that line of business. Start by replanning the go-to-market roadmap, with a focus on the core values and core customers that maximize survival. Oftentimes companies try to do lots of different things, but in reality there’s only one or two things they do really well. Everything else is a distraction that drives excess costs. Focus on the customers who have money and will have significant demand for your product or service. Then make sure to take really good care of them!
7. Get in line now for government support/non-dilutive funding (e.g. DoD, NIH grants), etc.
Most companies have probably filed for PPP funding, if not do so immediately, but there are other opportunities for government funding. Many of our Life Sciences and Healthcare Technology portfolio companies, such as XyZ, have applied for DoD and NIH grants administered via The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.
Nathan McDonald is the Chairman of Keiretsu Forum Northwest Regions.