This is Part II of a series, Part I was Crisis? 3 Ways VCs Adapt.
There is a global crisis going on as I write this article. It’s not the first, it won’t be the last. Entrepreneurs globally have been feeling the effects and in the US it has intensified especially in the last two weeks. Seed rounds are especially fraught with risk since they are typically the first infusion of institutional capital and where the startup doesn’t have any revenues. So how should you go about raising what is normally challenging in very challenging times? Much has been written on the topic, this post focuses on four very actionable take-aways.
1) CARES Act — If you are in the US reading this article during the covid crisis then you should absolutely be looking into the recently passed legislation. CARES provide for loans of up to 2.5 times payroll that are often forgivable provided that you retain employees and don’t cut salaries during a critical 8 week period. For seed It’s essentially a few months of free payroll. Venable and Fenwick & West are two reputable law firms whose articles on the subject are especially useful.
2) Cut The Burn — Very rarely startups consider the full range of options, below are some major ways to consider:
- reduce salary
- defer salary
- trade salary for equity
- furlough ie keep the employees on payroll and give them health benefits but don’t pay salary for the short-term
- layoff ie your employees could be then eligible for unemployment benefits and you could qualify for government assistance
- get partners / investors to defer bills
- get partners / investors to provide services in kind
3) Get More Cash — Also myriad ways to adapt, chances are at least one applies to your situation:
- raise debt, this will be especially hard if you don’t have revenues but may be possible if you have other collateral (eg assets)
- raise more (more on that later)
- sell or license IP
- do projects with short-term revenues (often these are also non-recurring ie NRE)
4) Raise More — It’s ironic to suggest raising a larger round when the normal fundraising is deeply affected. But there is actually wisdom in pursuing a countercyclical strategy, especially if it expands the potential set of investors. Say your original plan was to raise $2M and it would have been primarily from small funds or angels. Now you could change your plan to instead raise $3M instead, which opens up larger funds looking to deploy more capital for more ownership. How do you minimize the downsides of getting a large fund too early, say they don’t lead the next round (known as signaling effect)? One way is to actually create the board and have the fund take a seat, which means they will have a stronger reason to stay close to you.
5) Keep the Faith — Building a startup is hard enough, trying to get it off the ground during a crisis is even harder. Not all good teams make it but those that do are disproportionately successful. The 2001 crash for instance engendered a survival mindset in Paypal and allowed Google to recruit such a high quantity of talent — both those companies became game-changers. And if it is a consolation, there is evidence that seed is also the stage that recovers the quickest as this great analysis from Tom Tunguz shows.
This article is inspired by a conversation with Pete Moran. Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.