Understandably, venture capital and angel investors are focusing on protecting their existing investments to help them sail through the next couple of quarters. What does this mean for Vietnam’s startups looking for fresh capital? Who stands a higher chance of securing a seed round and later stage investments? What steps can a startup take to ensure business vitality, other than cutting operating costs?
Vietcetera asks MHV Partner based in Vietnam, Justin Nguyen, and industry experts to weigh in and explain the current investor mindset, as well as sharing advice on how young businesses can stay afloat and come out stronger after the coronavirus pandemic.
What guidance are you offering to your portfolio companies?
Early-stage companies are almost by definition “default dead,” so founders and CEOs need to adapt swiftly to protect their companies in these trying times. Decisiveness is key to survival.
For most companies, this will mean immediately slashing costs and instituting a hiring freeze, except possibly for hires that will pay for themselves nearly from the get-go. Next, take a long hard look at what can be moved to variable costs and move them now. Then, throw away your 2020 plan and start over by preparing three plans: 3-month, 6-month, 12-month not-business-as-usual scenarios.
Hopefully, one of the three plans is a “default alive” plan, meaning you will be able to reach cash-flow positive on your existing cash. If not, have the hard conversation with your existing investors on who might be able to do an internal round.
As you’re thinking about the new plans:
- Take the time to challenge your underlying assumptions when it comes to revenues and operating models.
- Focus on underlying unit economics and be cautious with burn rates and cash positions while heightening your sense of urgency.
- Rethink your current capital spending strategy and re-weigh top-line growth compared to your path to profitability. Founders should instead look to refocus and shift their attention to optimizing their contribution margin and making their cash last.
- Systematically review account receivables and account payables. Look at where you can delay account payables while aggressively collecting on your account receivables.
- Renegotiate customer contracts where possible.
- Close any ongoing partnerships or sales conversations now (even if you may not get what you were shooting for originally).
- Take the opportunity to fix any structural problems with your business now. When the dust settles, no one will be asking why your revenues dipped or why clients churned or why employees left during this period, so use this get-out-of-jail-free card to fix any foundational issues with your business.
If you’re fortunate enough to be cash healthy, keep in mind that this crisis may lead to market consolidation with some of your competitors going out of business. Keep an eye out for acquisition opportunities (which may not need cash and can be done through share swaps).
What should founders know when approaching investors today for fundraising?
It’s a tough funding environment out there – no doubt about it.
Know that VCs are looking long and hard at their existing portfolio companies and making tough decisions on which investee company might live or die, so they’re extremely busy and might not have the time to look at new deals. This is especially true with firms that have a non-concentrated portfolio and/or are light on decision making partners.
Know that VCs are very uncomfortable with making new investments without meeting the founders face to face, so start with investors that you have an existing relationship with. If you’re notching up (e.g. going from Seed to Series A), perhaps lean towards VCs that have boots on the ground where you are. At Monk’s Hill Ventures, we have team members in five countries in Southeast Asia – two of us in Vietnam – and we continue to engage and support entrepreneurs on the ground (with the appropriate measures, of course!).
Know that most investors are usually funding growth, not survivability. If you need cash to survive, it will be costly – if this is an available option at all. It’s not that investors are bottom feeders, but they need to justify to their LPs (limited partners) the extraordinary risk of putting cash into an early-stage company with nothing but a bet on a strong rebound when some semblance of normalcy will return.
With the coronavirus creating opportunities and limiting others, how has your investment strategy adapted to the crisis? Are you looking for a different profile of company now as opposed to before?
We continue to be active in the market and continue to look for great founders to back. Our investment strategy remains the same where we invest in Series A across different tech industries and sectors.
At the end of the day, we will always take a long-term view, and will continue to back founders and companies that are solving big problems on sound economics. Timelines may take a bit longer than usual as we work with potential founders on how they plan to ride this downturn and position their companies to emerge even stronger post-coronavirus.
As a firm, we’ve always taken a first-principles approach to investing. Given COVID-19, we are taking a longer and harder look at various industries and sectors, examining which verticals will be the most impacted during these trying times. We’ve also looked at how various potential investments may play out through the lens of various COVID-19 scenarios – to stress test the company’s thesis in the downturn and anticipate which might emerge even stronger afterwards.
The bottom line – we believe in backing founders in the region with great ambitions to build and scale tech-enabled companies that will impact millions of lives.
Written by Hao Tran and originally published on Vietcetera.