By Peggy Wallace, Managing Partner of Golden SeedsMarch 19, 2020
We currently find ourselves in an unprecedented time full of uncertainty, fear and confusion.
Now classified as a global pandemic by the World Health Organization, COVID-19 cases have been reported in all U.S. states and in 152 countries across the globe. As a result, global markets are plummeting. Oil is below $30 a barrel. The Fed is slashing interest rates and the pandemic-related unemployment rate is hovering around 20% and will likely continue to grow as businesses are forced to shutter. Financially speaking, things look quite bleak.
But we’ve been here before and we survived it. During the previous recession, which lasted from 2007 to 2009, many institutions fell into crisis. Real estate and other markets that were typically accepted as reliable investments instead turned into a tailspin, and it was a difficult time for everyone. In the aftermath of a world that felt upside-down, we, as investors, and our companies learned plenty of hard lessons. Since the world now faces a similar squeeze, we hope to offer smoother navigation through these rough waters.
Recovery today could require a different course; however, there are some valuable lessons that can still apply.
At Golden Seeds, even before the global pandemic, we felt we might eventually deal with a different type of recession cycle that would be based more on inflationary forces as the increasing climate danger and its associated costs are starting to play out across every level of our economy. Tariffs have been inflationary to businesses and consumers. We felt that we’re continuing to see 2008-like conditions with the growing deficit, as well as extremely high-debt burdens on consumers. Instead we have been hit with a Black Swan event in the form of the global pandemic and its staggering toll on humanity and our global economies.
Thinking back to 2008, our Wall Street backgrounds instilled awareness and concern for the impending recession early on. We issued early warnings to our small group of companies at that time. We did not see this one coming.
Based on the struggles and successes we witnessed from the last financial crisis, there are several steps people can take. How should startups work with investors and stakeholders? What effect will a downturn have on the future roadmap? The following are some steps for young companies to take for more resilience:
Watch your cash. Even if you have a term sheet, things can change rapidly now. Companies have to be incredibly careful and cut spending if sales aren’t at a steady level. In 2008, we saw two VC term sheets break, each about $3 or $4 million. In one case, the company never recovered, and the other had a very difficult time before making it through until the end.
Be transparent with investors. They can provide the guidance the company needs to sustain; after all, they’re likely the ones who will hang on once this downturn passes. Our companies that maintained good communication with us were more likely to receive financial support in a down market.
Adjust your mindset. Companies that were forced to watch their burn rates to survive a downturn can struggle a bit to get back to a fast-growth mindset when the capital starts flowing again. As board members and investors who have seen such cycles, it’s key for us to help young companies navigate this.
Understand your vendors’ financial viability. Companies must make these efforts; we witnessed companies that relied on suppliers or vendors who themselves were unable to fulfill orders, which can cause setbacks and other negative ripple effects. For example, we saw consumer product companies that received purchase orders from larger retailers only to discover that they were cancelled or considerably cut back because of the recession.
Be pragmatic about your product. It’s important for companies to determine whether their products or services are “nice to have” or “have to have.” In a financial crisis, customers will likely hold off on ordering the “nice to have” items or services.
And what actions should investors take in such a rocky environment? How will they be able to spot the organizations that will outlast the hard times?
As the first generation of female angel investors, we were the first to experience angel investing in a recession. At the time, we had only been investing for a few years and still didn’t fully understand how to differentiate between a company that would have otherwise performed badly — regardless of the impending recession — versus a company that could have likely weathered the storm. Here are a few tips we think will help investors form a game plan:
Enlist seasoned expertise. We could have used a team member or a mentor that had faced economic struggle in the past to avoid certain pitfalls that cropped up with the recession. We relied on our Wall Street expertise to make the best calls we could with the information at hand, but the stall in global activity was uncharted territory for everyone.
Stick with true leaders. You need CEOs who are determined to stay alive and come up with survival plans. They need tenacity and persistence. Without those characteristics, they’re never going to make it through.
Look for transparent companies. The teams that stay upfront with investors and maintain transparency will help everyone plan accordingly, particularly when things aren’t going well.
Recessions and uncertainty can be scary, as we are currently experiencing. But not everything has to be negative. In some ways, these environments force the companies to become real businesses and focus on breaking even, which can lead to some hard decisions. When talent becomes available during these cycles, good CEOs can really benefit from great hires.
Additionally, the landscape can really ignite innovation around the world. The downturn proved to be a great time for innovation — social media was basically born during the recession. People had the time (perhaps, unfortunately because of layoffs) to seek out their passion projects. Universities all around the world launched incubation hubs for entrepreneurship.
For anyone building an enduring company, this downturn is probably not the last they will see. The mark of a great company is one that has self-awareness about its position in the overall cycle. Each crisis is a real test of grit and resilience. For the ones that can withstand, there are new opportunities for inspiration, pivots and innovation.