How one venture capital firm is advising its startup CEOs to cope in this period of uncertainty

March 18, 2020, 1:37 PM UTC

You may remember I interviewed Drive Capital co-founder Chris Olsen last year in our series 5 Qs with a Dealmaker. Just a few months ago, Olsen and I were talking about capital efficiency in a world with seemingly unlimited funding. 

At the time, he said, “What’s exciting today is that there are more capital-intensive industries that are also now accessible because there are larger pools of money available.” 

Today, he’s telling companies that if they were planning to raise money in the next 18 months, “you need to assume that is now off the table.”

Like many venture capital firms around the country, Drive Capital is thinking through how to best advise its portfolio companies on surviving this period of uncertainty and market chaos. Drive sent its CEOs a detailed letter yesterday. 

“Calibrating COVID-19’s economic impact relative to other shocks in history is impossible,” the letter notes. “That said, we believe that if the trends of the last several weeks continue, COVID-19 will have an even more severe impact than the crises of 2008, 9/11, and 2000.” 

Here are several of the steps outlined in the letter. (Below is an except from the letter):

Stress test your company: If you were planning to raise money in the next 18 months, you need to assume that is now off the table, as Olsen said. The way to correctly stress test your business is to reduce current MRR by 30% while keeping operating expenses constant. If this math suggests you have enough balance sheet to survive 18 months, you have a high probability of surviving this crisis. If the answer is less than 18 months, work with your board and current shareholders NOW to pre-emptively get the financial commitments and plans to RIF established before this crisis deepens. 

Pull down all available debt capacity you have NOW: Cash is of the essence, and it will likely be more difficult to come by as the situation evolves.

Pause all hiring plans: Your burn rate aside, now is not the time to be adding people to your team. Now is the time to work to create a sense of normalcy for your existing employees who are working in a world that is very different from where they started the month. Headcount is a part of burn and will need to be managed. There are difficult decisions for everyone ahead and adding anyone to your team will not make these decisions easier. 

Do not hesitate: The cost of making bad decisions is higher during a crisis than a growth environment, but you still have to make decisions. Hesitating is the worst thing you can do. Set your expectations that painfully wrong decisions will be made, but know that you will get just as many right. You have to be a war time CEO.

You can watch Olsen break down the letter here

MAYBE NOT: SoftBank might be having a change of heart. In October, the Japanese tech behemoth agreed to a multibillion-dollar bailout after WeWork was close to running out of cash. According to the terms of the deal, SoftBank had agreed to purchase up to $3 billion in stock from existing WeWork shareholders, including ~$1 billion from ex-CEO Adam Neumann. 

Now, according to The Wall Street Journal, SoftBank believes regulatory probes into the business may allow it to back away from the deal it struck last fall to buy the $3 billion worth of WeWork shares. 

SoftBank has already invested $1.5 billion as part of a larger $5 billion rescue package it provided to WeWork, and this commitment has not been withdrawn. A SoftBank representative declined to comment to Term Sheet.

Read the full story here.

Polina Marinova
Twitter: @polina_marinova


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- Fox Corporation (Nasdaq: FOXA, FOX) agreed to acquire Tubi, a San Francisco-based streaming television and movie network, for approximately $440 million in net cash. Financial terms weren't disclosed. 

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