Editor’s note: Investor and entrepreneur David Gardner is founder of Cofounders Capital in Cary and is a regular contributor to WRAL TechWire.
CARY – A global pandemic, travel restrictions, falling oil prices and an official bear stock market are all leaving investors and entrepreneurs biting their knuckles this week. Some of our investors have been asking us what effect the coronavirus will have on our funds. We, in turn, have been asking our portfolio CEOs the same question and talking with our fund mentors who have had to navigate various economic downturns in the past.
Some early-stage companies in NC are reporting that they are going to be very affected by what’s going on, especially those that depend heavily on conferences for their lead generation. A major factor in whether a startup lives or dies is the length of the sales cycle it must endure. If that cycle suddenly elongates, a company can run out of capital before it reaches the necessary milestones to attract next-round investors.
Some portfolios will do better than others depending on the type of companies in them. We continue to believe that in general our fund thesis is well positioned for major market downturns. At Cofounders Capital, we invest in B2B solutions that produce demonstrable return of investment in terms of better, faster and/or cheaper offerings. When prospect companies are in a downturn, they tend to become increasingly focused on solutions that can improve efficiency and reduce costs. This has led some of our CEOs to the belief that, after travel restrictions are relaxed, their companies may grow even faster.
The most serious problem for early-stage companies will be the increased difficulty of garnering later-stage follow-on capital. Fund investors do not relish the idea of making capital calls when they may have to liquidate assets at a loss to do so. This leads some fund managers to radically slow down their investing to delay having to make those unpopular capital calls. Again, we believe our funds and companies are well positioned. Anticipating a potential market downturn, we raised a larger than normal seed-stage fund and as a practice, we have been reserving plenty of capital to protect our investments and keep them well capitalized for sustained growth even without a lot of outside funding.
In spite of all of the negatives coming out right now, there are some clear positives for early stage companies and their investors. The single biggest problem our companies have faced historically is the difficulty in hiring the professionals they need as they grow and the ever-increasing cost of those hires. Both of these problems are mitigated in an economic downturn.
I enjoy reading the biographies of great entrepreneurs which leads me to a final positive thought. Many successful entrepreneurs say that the start of their venture was the byproduct of having been laid off from their day job. It was this push out of the nest that led to the realization that they could fly.