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Insights & Thoughts – Jun 03, 2022

BLOG: What's next?

Blog author: Alain Nicod, Managing Partner, Technology

It is undoubtful that tech markets are severely hit. If this crisis extends beyond a short-term dip, it will reflect on venture valuations, money availability and accordingly on venture-backed companies’ strategies. 

Being a veteran of the venture industry (my first investment was done in 1989…), I share some thoughts on what might lie ahead of us.  This is not a message of doom and gloom, it is just a collection of thoughts to help entrepreneurs make the right decisions. 

The good news is that well-run companies with a strong value proposition will do well in the long run. The surviving teams tend to come out stronger and united from storms they weathered successfully. The investors, which keep a long-term vision, tend to make good money in post crisis years in spite of an ugly short-term write-off in their books. 

On the other hand, flaky business cases, arrogance, lack of value for customers, and misaligned interests of the various stakeholders will likely lead to the collapse of the underlying companies. As usual in nature, the strongest will survive! 

There is also no doubt for me that solid technology companies will increasingly dominate the economic world in decades to come. I am ready to bet on their long-term value, whatever happens in the short term. The power of technology is unprecedented and has exponential potential. The 21st century will see many new technology winners blossom. 

Obviously, founders and key team members are concerned about their level of ownership in their companies during periods of adverse weather.  In recent years, they managed to raise money at particularly accretive conditions for themselves.  Valuations have been hitting all-time records in 2021. If founders do not need further funding, good for them. If they need further financing, some pragmatism will have to prevail.  

Previous downturns demonstrated that strong teams end up owning 15-25% of their well-financed venture-backed companies, no matter their history. There is a natural check and balance between them and the investors when down rounds / ratchets / etc. take place. Smart investors know that it is not sustainable to own 100% of a company. They need a motivated team to run the company. Better negotiate conditions of next rounds while there is still some cash in the pot.  Make sure that the interests are aligned with all stakeholders (management, employees, shareholders, commercial partners if any, etc.) in any new deal construction. Complex structures with liquidation preferences and other punitive clauses tend to bite back at some point in time, in particular when they are negotiated under extreme pressure. 

If companies needing money have sold out preferred shares and / or stringent ratchets, my recommendation is to deal with the issue sooner than later. Simply adding a layer of toxic paper will not do it in the long run. The best way often is to find a compromise on the next valuation against a simplification of the cap table. More junior shares get hit harder than senior ones.   

Common shares, if owned by founders and employees, should get some degree of protection. 

Shareholders running out of money, or feeling cold and in the dark in spite of cash reserves, might suffer. It takes long term vision and courage to maintain a given percentage in a portfolio company.  

I will finish this blog with a few messages for the founders and / or management: 

  • Remain transparent on the situation at all times and with all stakeholders 

  • Find the right compromises for all parties affected by a potential downturn 

  • If tough decisions need to be taken, take them fast and in one go 

  • Focus on key value drivers and on simplicity 

  • Find a way to recharge your batteries.  It can be anything that suits you (meditation, running, biking, playing an instrument, painting, etc.). Do it regularly. Do not let yourself go down the drain 

  • If you have a bear in your garden, you either tame it or you need to make sure you kill it with the first bullet.  Any other scenario will not end up well. This is true for any negotiation you will need to have with various stakeholders. Some might be rough and tough 

  • Do not panic. This will contribute to build trust in you 

  • Look over the horizon.  This is what helps in storms when you are at the helm of a boat.  There is no difference with running a company.

I wish you much success for the next decades! I trust in your leadership and vision. 

 

 

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