As I am writing this post, the public markets have dropped precipitously with the S&P, NASDAQ, and Dow each down over 7% for the day. The spread of the Coronavirus and a potential price war in the oil market have spiked investor fear once again. It is not clear yet how much of this is short term paranoia, but it is clear we will see some slow-down in economic activity as we wait to get better data on the continued virus spread and the corresponding death rates. Fear will overwhelm greed for a while. This will leave us in a period of uncertainty that is a challenge to navigate for both early and late stage companies alike. Much has already been written on this in the VC world, including good posts from Sequoia and Tomasz Tungz at Redpoint.
We’ve kept our advice to portfolio companies that still need access to capital pretty simple at this point and suggested they ask themselves a few key questions in light of the current market:
How efficient is our current growth?
There is still a historically massive overhang of undeployed capital in the venture and private equity markets. This money needs to be put to work in defined time periods, and as a result, these markets will remain open for good companies that are growing efficiently. For SaaS companies, this means double checking core growth metrics like CAC, LTV/CAC, SaaS magic number, and payback time periods.
What are the leading indicators of a change in our company’s growth and retention?
Don’t just focus on realized bookings or churn. Look upstream at the future indicators of change in sales velocity and retention. Closely monitor lead generation, conversion ratios in each step of the sales process, product engagement metrics, etc. If growth continues to be efficient and leading indicators are still all green, keep leaning into your growth plan.
How will we manage the business if our leading indicators start flashing yellow and red?
Do your scenario planning now, and have a specific action plan to shift course and reduce cash burn if you see indicators of a pending slow-down in sales or a spike in churn. The markets will not reward you for continuing to invest in inefficient growth.
How can we turn the current market dynamic to our advantage?
Think about how your product/service can help customers navigate the current circumstances. Review your marketing and sales messaging and make sure to add or emphasize how you can help a prospect’s business in the current market dynamic.
Do we have additional capital available to us now?
If you have additional equity or debt capital currently available at attractive terms, take advantage and give your company more padding to weather the storm. You won’t regret it.