Podcast Summary
Emphasizing personal well-being and business growth during challenging times: During the coronavirus pandemic, focusing on personal well-being and business growth is crucial. Listeners can benefit from discounts on NetSuite and Assure services, while Jeff Richard discusses the impact of the pandemic on startups and the future business landscape. Despite uncertainty, the future holds potential for affordable testing and tracing.
During challenging times, it's essential to focus on both personal well-being and business growth. The speaker, who is in quarantine during the coronavirus pandemic, emphasizes the importance of livelihoods and businesses in people's lives. He introduces sponsors NetSuite and Assure, offering listeners discounts on their services. Jeff Richard, a managing partner at GGV Capital, joins the podcast to discuss the impact of the pandemic on startups and the future business landscape. Despite the uncertainty, the speaker remains optimistic about the future and the potential for affordable testing and tracing. The podcast also touches on the experiences of being in quarantine and the adjustment to remote work.
Learning from Past Economic Downturns: Despite the current economic uncertainty, history shows that after major crises, the tech industry and economy will eventually bounce back, although some industries may face longer recovery times.
While the current COVID-19 crisis is a challenging and uncertain time, history shows that after major crises, there is often a balanced and optimistic outlook. The speaker, who has experienced previous economic downturns, believes that the tech industry and the economy will bounce back, but it may take six months to two years. However, the impact on certain industries like travel, hospitality, and restaurants may be more severe, and survival for small businesses in these sectors could be challenging. Asia, which has already experienced the worst of the crisis, provides some hope for a potential recovery. The speaker encourages entrepreneurs to make necessary changes, invest in their customers, innovation, product, and people to be ready for the eventual economic rebound. The timeframe for recovery is uncertain, but the belief is that it will happen.
COVID-19 recovery in China and Japan: China and Japan recovered from COVID-19 through aggressive measures like fever tracking and app usage. Schools and ICUs are back to normal. U.S. shows optimism with increased testing and potential for quick tracing. Stock market shows signs of recovery and entrepreneurs adapt.
Countries like China and Japan, which were heavily impacted by the COVID-19 crisis around the Chinese New Year, have managed to bounce back with aggressive measures such as tracking fevers and using apps. Restaurants are open, kids are back in school, and ICUs are empty. The U.S. is not dealing with the crisis in the same way, but optimism remains high due to increased testing capabilities and the potential for quick tracing and isolation of positive cases. The stock market has already shown signs of recovery, and seasoned entrepreneurs are adapting and staying optimistic for the future. While the situation remains regionalized, there is hope that businesses may reopen sooner than anticipated.
Navigating the economic crisis with quick decisions: CEOs must acknowledge the crisis, make quick decisions, and focus on present survival to thrive in the post-crisis economy
The current economic crisis requires swift and decisive action from companies and their leaders. Unlike the 2008 financial crisis, this crisis came on suddenly and with great force, leaving little room for debate or a gradual response. CEOs, even those who are first-time founders, have had to make tough decisions quickly to ensure their companies' survival. These decisions include significant pay cuts, layoffs, and restructuring. Companies that have been prepared and have the right tools, like NetSuite, have been better positioned to navigate these challenges. The key is to acknowledge the situation, deal with it as quickly as possible, and focus on the present rather than past growth rates or valuations. The faster companies adapt, the better their chances of not only surviving but thriving in the post-crisis economy.
Preparing for Economic Downturns: Advice from Experienced Investors and Board Members: First-time founders should freeze hiring, create revenue and growth scenarios, focus on cash flow management, involve a finance executive early, and prepare a survival plan (Plan C) for uncertain economic times.
Experienced investors and board members play a crucial role in preparing first-time founders for economic downturns by providing them with a dose of reality and helping them understand the potential impact on their business. This includes advising them to freeze hiring, create revenue and growth scenarios, and focus on cash flow management. Many first-time founders lack financial expertise and may not be actively managing their cash balances, making it essential to involve a finance executive early on. Additionally, the resistance to creating a "Plan C" or a survival plan for tough economic times may be due to the recent economic climate, where such planning was not necessary for the past decade. However, with the current economic uncertainty, it is crucial for founders to be prepared for various scenarios to keep their businesses afloat.
Importance of Independent Board Members during Crisis: Independent board members with relevant industry expertise and executive experience provide calm, balanced advice and unbiased opinions to founders during crises
Experience matters, especially during times of crisis. Many board members in the venture capital industry today haven't lived through a financial crisis before, making it a nerve-wracking experience for them. This lack of experience can lead to panic and unhelpful behavior. Independent board members, on the other hand, who have run businesses themselves and are not invested in the company, can provide valuable, calm, and balanced advice to founders. These independent board members are not motivated by their personal investment in the company, allowing them to offer unbiased opinions and guidance. When picking independent board members, it's essential to look for individuals with relevant industry expertise and executive experience. Their unique perspective can bring valuable insights and help navigate through challenging times.
Independent board members vs investors: Objective advice vs capital preservation: Independent board members provide objective advice and help navigate challenges, while investors prioritize capital preservation. Founders should consider a balanced perspective.
Having independent board members with no significant financial stake in a company can bring valuable objective advice, whereas investors with large stakes may prioritize capital preservation over long-term growth. Independent board members can act as a great sounding board for founders and help navigate through challenging times, ensuring the best interests of the business, team, and shareholders are considered. However, misalignments can occur when newer firms with less track record feel pressure to drive quick exits, potentially leading to decisions that may not be in the company's long-term best interest. It is crucial for founders to have a balanced perspective and consider the pros and cons before making significant decisions.
Pooling investments through Special Purpose Vehicles (SPVs): SPVs help manage large angel investment syndicates, maintain clean cap tables, and offer professional services.
Special purpose vehicles (SPVs) play a crucial role in syndicating angel investments among accredited investors. An SPV is a separate legal entity used to pool investments from multiple investors and appear as a single investor on a startup's cap table. Jason Calacanis, the speaker, uses Assure, a leading provider of SPVs and fund administration services, to manage his syndicate, which is the largest in the world with over 4,000 members. SPVs offer several benefits, including keeping cap tables clean and simple, and providing professional and customer-focused services. Jeff Richards, a managing partner at GGV Capital, invests in around 40-50 CDNA stage companies per year, with typical check sizes ranging from $100,000 to $35 million. Despite the economic uncertainty, deals are still getting done, and investors like Richards and Calacanis are focusing on supporting their existing portfolio companies first before making new investments.
Adjusting valuation expectations during economic downturns: Founders need to communicate openly with investors and seek advice during economic downturns to adjust valuation expectations. Being adaptable and maintaining good relationships are key to getting deals done.
During economic downturns, founders may need to adjust their valuation expectations when raising funds. This is due to the correlation between the public and private markets, and the potential shift in market conditions. Founders who have long-term relationships with investors and are flexible are more likely to get deals done without retrading on terms. However, those who raised at high valuations in the past and are holding on to those expectations may find it harder to adjust. It's important for founders to communicate openly with investors and seek advice from experienced advisors during this process. In the cases where investors propose a change in valuation, founders can consider splitting the investment into tranches with an option to raise the remaining amount at a later date. Ultimately, maintaining a good relationship with investors and being adaptable to market changes are key to getting deals done during uncertain economic times.
Focusing on win-win structures with investors during tough times: Founders should aim for clean terms, alignment of incentives, and remember lender's primary concern in debt financing during economic downturns
Founders should focus on creating a win-win structure with investors, even during economic downturns. Experience, brand, and working with good people are crucial during tough times. Liquidation preference, an unfamiliar term in recent years but common during financial crises, is a form of downside protection for investors. Founders should aim for clean terms and alignment of incentives, rather than complex liquidation preferences that could create misalignment and potential conflict. In the case of venture debt, founders should remember that the lender's primary concern is the return on their debt, regardless of the company's ultimate sale price.
Navigating challenging economic scenarios: Consider screening questions for hiring, work with reputable debt providers, and use LinkedIn Talent Solutions for efficient hiring process in uncertain economic times.
In uncertain economic times, companies may face challenging scenarios such as venture debt going belly up or the need to lay off a large number of employees. In such situations, it's crucial to have a well-thought-out plan to handle these situations as safely and gracefully as possible. This includes considering the role of screening questions in the hiring process to find the right talent for your business, and the importance of working with reputable venture debt providers who are willing to have constructive conversations during tough times. Additionally, LinkedIn Talent Solutions can help streamline the hiring process and save time by suggesting applicable screening questions based on your job description. Overall, being prepared and proactive can make a significant difference in navigating these challenging scenarios.
Considering Venture Debt: Weighing the Benefits and Risks: Founders should carefully weigh the benefits and risks of venture debt, have a solid financial team, and effectively manage the debt to avoid potential complications in changing market conditions.
While venture debt can provide additional funding for growing companies, it's important for founders to carefully consider the decision and have a solid financial team in place to manage it. Venture debt can be an attractive alternative to equity financing when valuation is a concern, but it comes with terms and interest payments that must be met. With the recent market reset, many companies may find themselves in unfamiliar financial territory and potentially facing challenging conversations with venture debt providers. Founders should weigh the benefits against the risks and ensure they have the resources to effectively manage the debt. Additionally, the use of venture debt instead of equity can avoid valuation resets and dilution, but it also comes with potential complications and strings attached that may become problematic in changing market conditions.
Understanding Financial Complexities in Startups: Founders need expert advice and a strong understanding of their company's financials to navigate complex financial instruments and avoid taking on too much debt, especially those with low gross margins. Seek alternative options like pivoting or non-dilutive funding when facing weak product-market fit and dwindling runway.
Navigating complex financial instruments like debt and equity in a startup can be dangerous without proper guidance. The lack of counseling on these matters can lead founders to take on more debt than they can handle, especially if they don't have a CFO or a strong understanding of their company's financials. A reasonable debt-to-revenue ratio depends on a company's gross margin, and those with low gross margins should exercise caution when considering debt. For founders facing a weak product-market fit and dwindling runway, it's essential to acknowledge reality and consider alternative options, such as pivoting the business or seeking non-dilutive funding. In summary, understanding the financial complexities of a startup and seeking expert advice are crucial for making informed decisions and avoiding potential pitfalls.
Identifying and addressing market challenges early on: Pivoting to better opportunities, assessing cash runway, considering M&A, focusing on cash flow positivity, and exploring SPACs can help companies adapt to market shifts and secure their success.
Recognizing and addressing market challenges early on is crucial for a company's success. When a team identifies a better market opportunity, pivoting can lead to significant growth and success, as demonstrated by companies like Twitter and Slack. However, it's essential to assess the available cash runway and the potential for an M&A process, which typically takes six months. In a down market, selling a company may not be an option due to the lack of buyers. Additionally, focusing on becoming cash flow positive can be an alternative strategy, especially for smaller SaaS businesses. SPACs (Special Purpose Acquisition Companies) offer an alternative route for companies to go public and can potentially provide a lifeline for cash-strapped businesses. Overall, it's important for companies to remain adaptable and proactive in response to market shifts.
Turning struggling software companies into public firms during economic downturns: During economic downturns, founders of cashflow positive software companies have the most leverage for acquisitions. Strong investment firms with proven track records are crucial for investors to deliver returns. Personal success stories include Buddy Media, Appurio, HashiCorp, Affirm, and Airbnb, even in hard-hit industries like travel.
During economic downturns, founders of struggling software companies may have the opportunity to be acquired at reasonable multiples and turn their businesses into public companies. However, those who can quickly achieve cashflow positivity will have the most leverage in negotiations. For investors, having a strong investment firm with a proven track record and trust from limited partners is crucial for delivering returns. Personal success stories include investments in companies like Buddy Media, Appurio, HashiCorp, Affirm, and Airbnb. The latter, despite being in the hardest-hit industry due to the travel sector's collapse, has an unbelievable brand, trust with guests and property owners, and is navigating the crisis by providing shelter for hospital workers. Ultimately, the outcome for investments during economic downturns is uncertain, but having a strong foundation and being creative can lead to positive results.
IPOs recovering as demand for high-growth tech companies increases: The IPO market is recovering, with tech companies trading above their IPO prices. Long-term growth is key, as companies like Alibaba and Zendesk have grown significantly post-IPO.
The IPO market is showing positive signs of recovery, as companies like Build.com and Datadog are trading above their IPO prices. This indicates that there is demand for tech companies with high growth rates when market volatility decreases. Furthermore, there is expected pent-up demand for travel as people long to experience new places once the confinement ends. Companies like Airbnb, which were rumored to be going public through a direct listing, will likely be in high demand due to their trusted brand. While the IPO price may not be the focus, long-term investment is key. Companies like Alibaba and Zendesk, which had lower market caps during their IPOs, have since grown to be worth billions. As a firm, they advise entrepreneurs to focus on their future growth rather than the IPO price.
Investing in high-growth tech companies can yield significant returns, even after lockup period: Despite market volatility, investing in high-growth tech companies, like Ring Central, Square, and others, can create significant value and capture a larger market share during economic recoveries. Staying the course and being all in on winners is crucial.
Investing in high-growth tech companies, particularly those that go public, can yield significant returns, even if you miss the initial lockup period. Companies like Ring Central, Square, and others have seen massive growth and net dollar retention, making them attractive long-term investments. However, holding onto these stocks can be psychologically challenging during market volatility. Despite the potential for short-term swings, many investors believe these companies will continue to create significant value in the coming years, with an estimated $2 trillion in market value expected to be created in the next 10 years. It's essential to stay the course and be all in on the winners, as they are poised to capture a larger share of the market during economic recoveries. Google, Amazon, Microsoft, and other dominant tech companies with strong balance sheets and management teams are also worth considering for their long-term growth potential, despite regulatory and government risks.
The Current Political Climate Favors Innovative Companies Over Antitrust Concerns: Focus on innovation and providing value to consumers to maintain competitive edge, antitrust regulations could make sense in specific cases.
The current political climate in the US favors companies that offer innovative and user-friendly products, rather than those that are broken up due to antitrust concerns. The speaker argues that breaking up tech giants could give an advantage to international competitors, specifically China. Instead, these companies should focus on collaboration and creating sustainable ecosystems. For instance, Zoom's success can be attributed to its superior product, empathetic CEO, and global appeal. However, creating a new product or disrupting established categories like social networking or app stores is a challenging task. The speaker suggests that antitrust regulations could make sense in specific cases, such as the App Store's monopolistic control over distribution on Apple devices. Overall, the key takeaway is that companies should focus on innovation and providing value to consumers to maintain their competitive edge.
Frustration with purchasing audiobooks within Audible app: Audible's inability to sell audiobooks directly within their app may lead to lost sales for publishers and a suboptimal user experience for consumers.
The inability for Audible customers to easily purchase audiobooks within the Audible app is a significant point of frustration. This issue, compounded by the fact that Audible is owned by Amazon, has led to a loss of potential sales for publishers and a less than ideal user experience for consumers. The speaker expressed a belief that if Audible made it possible to buy audiobooks directly within the app, they could potentially sell more books. Additionally, the speaker emphasized the importance of staying safe during the ongoing pandemic and encouraged good hygiene practices. Overall, the conversation touched upon the importance of user experience and the potential impact of small inconveniences on sales and customer satisfaction.
