Navigating Uncertainty: The Investor Perspective
Airbase’s Navigating Uncertainty series began with a candid panel discussion including Ravi Gupta, partner at Sequoia Capital and Ajay Agarwal, partner at Bain Capital Ventures. Key Takeaways include:
- Today’s VCs expect their CEOs & CFOs to work in partnership during any downturn, challenge every assumption, and take decisive action.
- True leaders practice radical transparency to their employees to convey the depth of thought that went into any decisions.
- The very powerful, dynamic role that the CFO can play in this environment is to give real-time data with a dashboard view to the CEO, managing team, and board that could never be done before.
In the first session of our series Navigating Uncertainty, Airbase CEO Thejo Kote’s engaging conversation with two experienced investors focused on the state of the emerging economic downturn. He elicited their perspectives on what the crisis means for businesses, and in particular, the important role to be played by finance leaders.
- Ravi Gupta is a partner at Sequoia Capital. Prior to joining Sequoia, he was COO and CFO of Instacart. He also spent time at KKR and McKinsey.
- Ajay Agarwal is a partner at Bain Capital Ventures, investing in early-stage software companies. He led product and sales as an early employee at Trilogy, an enterprise software pioneer.
First and foremost, both panelists began by noting the unique aspect of this situation as a health crisis, where safety must be prioritized. Acknowledging the unprecedented time that we are in, they each shared valuable insights and stories about how today’s disruption compares with previous economic downturns.
The need for decisive leadership was emphasized with a discussion on how being decisive means different things depending on how a company is being impacted by the economic crisis. The panel was held on 3/27, as the coronavirus outbreak was growing rapidly across the country and the economic impacts of closing businesses resulting from shelter-in-place orders were only just beginning to be felt.
Against this backdrop, both men answered difficult questions about how to cut costs. They provided front seat insights to what investors are looking for as best practices from their CEOs and CFOs. They described the partnership between venture firms and their portfolio companies, and the ways that venture firms are supporting their investments. The discussion also focused on the role of the CFO in this crisis. Their suggested actions for finance leadership to support their CEO and to serve as true counsel and advisor were particularly helpful. See below for edited excerpts of the questions and answers. The full recording can be found here.
If you were to pattern-match today with earlier economic downturns and what you’re seeing across your portfolio companies, what’s your prediction for how bad this downturn will be?
I don’t see [today’s crisis] as immediately pattern-matched with prior [downturns]. It could play out for a longer period of time with a longer recovery.
There’s confidence that it is something that will recover. We will get through it. But I think that people [who] claim to know how long it will last, are overestimating their capabilities.
With reference to Sequoia’s Black Swan letter from two weeks ago, has anything changed in the mood at Sequoia? Have you been talking about it differently in the last two weeks?
The purpose [of the letter] was to say, "Look, nobody knows your business the way you do." And so, this is not us telling you, "Go do this." It’s us telling you, "Here’s what we’re seeing."
[We believe] you should question every assumption in your business. And Sequoia believes you’d much rather have done too much than too little.
The step-change cut is the one that we think creates a real problem. And the language we use internally is “survival of the quickest.” I think that we really believe in that. A lot of what the memo is intended [to show] is trust in the founder to figure that out, [and also] a real obligation to see reality very clearly.
Ajay, you’ve been through two of these [downturns]. It’s very early in this process, so what are you thinking right now in terms of how it’ll turn out?
This crisis is going to have very profound implications on a global, societal level. I think it’s very hard to know at this point how that’s all going to play out.
In 2001 and 2008, you had a freezing of start-up capital. It was specifically because of the dot com bust and the wake of the banking crisis, the financial crisis.
I think what you’re seeing in this era, is certainly capital markets, even within the venture world, are somewhat frozen. But there is a lot of dry powder that’s sitting on the sidelines; [and] there’s a lot of capital that’s been raised.
The second profound difference [compared] to 2001 or 2008, is the majority of software companies were upfront license and maintenance companies. They were not recurring revenue companies.
Today, the majority of software companies are recurring revenue software companies. And so, as long as you have a high level of gross revenue retention, you do have a base of revenue that provides some real protection in this climate. That, I think, is a very, very different dynamic [from] the last two cycles.
The third piece is that for many startups, and certainly the bulk of our portfolio, the access to capital over the last couple of years has led to more frequent and much bigger rounds. And so, unlike 2008, many of our companies had been on annual fundraising cycles, rather than every three years, and are sitting on quite a bit of capital on their balance sheets.
There are many companies in the middle, not benefiting from and not being shut down by the crisis, where it’s just unpredictable. And decision-making [is] difficult because you don’t know when the recovery might happen. What are you telling some of your portfolio companies, that are in the middle, how to think about that?
If you’re on one end or the other of the spectrum, in general, I agree with Ravi’s advice, which is you’ve got to act quickly, and decisively, and make the changes. But I would say that there are a number of our companies that are somewhere in the middle. Where they’ve chosen to make some quick, decisive actions right away on cutting demands, and spending, and marketing spend, and freeze hiring, and so forth, but are taking a bit of a three- to four-week time frame to wait and see before making more aggressive headcount reductions and layoffs.
Let’s take a B2B software company, particularly one where it may take six, nine months to bring up your sales force. There may be a fair argument to say, "Let’s wait 30 days because if we make a dramatic change to the capacity and the recovery is sooner, there’s going to be real costs for us."
And, by the way, in 30 days if things are worse, we’ll have preferred to wait a little bit and made one big decision, as painful as it might’ve been, as opposed to having to make a series of decisions. There is some merit [in that], particularly as it relates to layoffs and headcount reductions. Maybe give it two, three weeks. Have the plans ready, have the scenarios ready, cut the stuff today that you can cut, but let’s see how this situation plays out for a few weeks and then make the hard calls then.
Let’s shift a little bit towards execution. Ravi, what other specific steps are your portfolio companies taking that you think represent best practices?
The reality distortion field that [was referenced in Steve Job’s biography] is something that is so valuable for founders in many ways because so many people doubt [founders] on what they’re building.
I think the role of the CFO or the finance leader in this environment is to help the founder see reality very clearly. It means full recognition of what is happening in our business today.
The best companies pick a path and they go. To Ajay’s point, if you’re going through things that you observe to be one-way doors and things that involve people’s lives, like layoffs, if you think you’ll know a lot more information in two or three weeks, absolutely wait.
[But,] there’s always the risk that you would think you’ll know more [later]. [But,] if you think there’s an event [that will impact your thinking] and you want to time-bound it, put that stake in the ground and say, "We’ll decide on this date." Great companies are looking at this as an opportunity to make the changes they should’ve made beforehand.
I think the role of a finance leader is to be a part of the “we.” This is not a “they” problem, this is a “we” problem. The whole company has a problem. Be a partner to the founder/CEO and help that person see reality very clearly rather than be in the distortion field.
Ajay, CEOs and CFOs are always encouraged to decisively cut if they have to. What should they look at to make these decisions? And what are some of your lessons you have taken away over your career
Both finance leaders and CEOs in our portfolio, are looking at scenarios and picking some of the more conservative downside scenarios as their base case scenario
I’d recommend that go with decisiveness, particularly in this environment. For this crisis in particular, there is a notion of shared sacrifice.
There’s a whole set of things that are built into the cost structure, that when you are trading off people’s jobs and headcount reductions, it becomes very clear that we’d rather collectively sacrifice those things than have an extra person have to walk out the door.
The other piece around the decisive action is making sure that enough thought is going into how this is going to be communicated, how much transparency can be provided to the employees to convey the depth of thought that went into any decisions.
Ravi, if you were to wear your CFO hat, what would your advice be to finance leaders? What makes for a good, high quality, finance leader?
Great relationships are often forged in crisis. When you go through something together, you really can come out on the other side in a way that there is a much stronger bond.
There are these statements [that] crises build character. Probably more realistically, crises reveals character.
[I recommend] being a shock absorber rather than a shock amplifier, [this] is important for a CFO right now.
When I say be part of the “we”, that means that you are part of the leadership of the company. You represent the company when you speak to the company about things that are happening that are tough decisions; you are part of the “we” that made the decision, and the CEO, they’ve got to know that you’re there with them.
[Tell your CEO] "Here’s where we are," and then, "Here’s what we’re going to do about it."
There’s a Wu Tang song that says, "Cash rules everything around me." This is the time to understand that and to be that counsel to your CEO as well. The CEO absolutely might be thinking about the business from a global perspective, but that person might not be thinking about just the pure cash.
So, I think to summarize, I’d say be part of the “we.” Be a real partner to really help them see where we are and what we can go do about it.
Would you even recommend that companies try to go raise money out there right now in this environment?
Just one other comment on Ravi’s advice to CFOs that I wanted to share. I think an interesting aspect of 2020, again, versus 2008 and 2001, is that most of our startups are incredibly instrumented. The data exhaust around the business and around the leading indicators of the business, whether those are MQLs, or SQLs, or qualified meetings, or webinars, demos, whatever, it might be that [they] are the upstream indicators of turn and customer success, activity and engagement in your product. I think many of our companies have created for us as investors and board members a kind of a real-time dashboard.
That’s a very powerful dynamic role that the CFO can play in this environment because we all have so much more data on our businesses. We are analyzing them on an hourly and daily basis. And so, I think that gives a kind of dashboard view to the CEO and managing team in today’s [world] that could never be done before.
In terms of raising money, if you’re a company that’s been dramatically affected because of the crisis, your revenue’s evaporated, you’re selling into an industry that’s been a first-order victim of the crisis, I think your best bet is going to be to [go to] your existing investors and your board. And I think investors in general are stepping up to support companies.
What should a CEO be demanding of their board at a time like this?
[In] the book Give and Take by Adam Grant, [there is] this concept which is a parents job is not to be either demanding or supportive, it’s to be both.
That means sharing and having the tough conversation [like], "Look, if we don’t change X, Y, and Z, we won’t survive, or our valuation will be hurt, or we won’t serve our customers."
The board needs to tell the truth, which is if they think that they have great prospects and this is a hiccup, they’ve got to be there with a checkbook too.
Values only matter when it’s hard. This is the time where I think that CEOs should expect their board members to honor their commitments that they made when they’re whispering their sweet nothings, trying to get the deal. And I think the best ones will. I absolutely believe that. But I think this is the time for real partnership.
Ajay, you’ve been through two downturns now, one as an operator, one as an investor, what does good leadership look like in a time of uncertainty like this?
Number one, it’s sober realism. Having a very sober, clear-eyed understanding of the situation. Secondly, it is decisive action, and taking action, and making hard calls, and hard decisions. Third, it’s calmness under pressure and understanding that the company is looking to you for calm, steady, leadership.
It’s important for the leader to celebrate the many positive things at a human level.
Years from now, when the history of a particular start up [has] been written and people look back, it’s going to be those stories that people remember more so than anything else.
And I think this is the time for those stories to happen, and for those stories to be written. And that is the positive side of this hardship that we’re all going through.
This panel session was held March 27, 2020. The full recording can be found here.
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