Webinar: How Will VCs React to COVID-19?

April 29, 2020

During this webcast, EisnerAmper was joined by leading venture capitalists as they discussed the topic of investment in the time of COVID-19.


Transcript

Alan Wink: Good day everyone. I hope everyone is safe and sound during these truly extraordinary times. My name is Alan Wink. I'm the managing director of capital markets at EisnerAmper and I am joined by my colleague John Pennett as co-moderators of this afternoon's webinar.

The topic that we'd like to cover this afternoon is venture capital investment in the time of COVID-19. Many of our clients in the tech and life sciences space are out trying to raise capital today and we are constantly getting questions about the current investment climate. So John and I thought that it would be a good idea to bring together a group of VCs from across the country to discuss the current VC landscape.

Our panel today consists of VCs from New York, New Jersey, Florida, Pennsylvania, and California. Our participants include John Frankel from FF Ventures, Elaine Russell from Greycroft, Sean Dowling from Osage Partners, Jim Gunton from Tech Council Ventures, and Mark Volchek from Las Olas Ventures. I cannot thank each of you enough for agreeing to participate on this panel this afternoon.

Quarter one of 2020 started off as a very good quarter for VC investment with about $34 billion invested, and then boom, COVID-19 hit and the world changed. So let's allow our panel this afternoon to discuss how the venture capital industry is adapting to the market changes brought about by COVID-19. I have asked each of the panelists to start off by giving a very brief introduction of their fund. Elaine, you traveled the farthest from California, so why don't you start?

Elaine Russell:Yes. Hi Alan, and thank you for having me. Hope everyone can hear me okay. So, I am at Greycroft and I am responsible for leading a fund that is backed by Albertsons, the grocery retailer. We are a $50 million fund. We sit alongside Greycroft's core fund, which focuses on seed and Series A stage deals. And the Albertsons Fund is specifically looking at future of retail opportunities. This can be both consumer facing future of retail or new retail concepts, all with an internet or a software component. And then we also look at software that's enabling retailers.

Greycroft as a whole is a $350 million fund, and we also have a late stage fund as well for Series B and follow-ons. And then this Albertsons Fund sits alongside that earlier stage fund. And we are based in LA and New York. I happen to be in the LA office, but thanks again for having me.

Alan Wink:Thanks, Elaine. Mark Volchek from Las Olas Ventures.

Mark Volchek:Got to unmute myself. So, we're a Florida based early stage venture capital fund. We focus on seed, kind of pre-seed to Series A, but mostly seed stage venture deals, mostly in the Southeast, although we do have a few investments up in New York and up and down the East Coast, and we've spent a number of trips in Texas as well. We focus exclusively on B2B software. So we look for companies that make other companies more efficient, ultimately. And then some areas that we spend a little bit more time include DevOps, logistics, sales enablement, and a variety of other work efficiency tools. So that's kind of what we focus on. Fund one is a $30 million fund and we're fully invested in that, and we just started testing out a fund two as we were still raising fund two. So that was an interesting time for that as well.

Alan Wink:Thanks, Mark. John Frankel from FF Ventures.

John Frankel:Hi. Good afternoon everyone. FF Venture Capital is based in New York, though honestly I think it's based in everyone's front rooms at the moment. It's a seed to early B fund. So we started the seed round, we stopped investing at a 50 million valuation. We’re a highly engaged investor.

Alan Wink:Jim Gunton from Tech Council Ventures.

Jim Gunton:Thanks, Alan. So Tech Council Ventures is an early stage investor managing about 130 million. We target series seed, Series A, and Series B, investing up to three or four million initially and reserving capital as the company grows. We target the Mid-Atlantic region of the US and all industries.

Alan Wink:Thanks, Jim. And Sean Dowling from Osage Partners.

Sean Dowling:Sure. Thanks Alan and the Eisner team for hosting us, and to everyone listening, my name is Sean Dowling with Osage Venture Partners. We're based in Philadelphia. We focus on early stage B2B software companies on the Eastern half of the US. Early stage for us, post revenue businesses that have some meaningful market traction typically close to about a million dollar run rate when we're first investing. We like to lead or co-lead a Series A round with a $2 to $5 million check. All B2B software that's deep at the infrastructure layer at the application layer, horizontal vertical solutions, and just lean for an ROI driven decision making process on the buyer side. And then from a geographic standpoint focused on the Eastern half of the US and we're investing out of our fourth fund right now, which we just launched the new fund as of January 1st and look forward to the conversation.

Alan Wink:Thanks, Sean. As I said in my opening remarks, we're getting questions all the time about, especially over the last six or seven weeks, are venture capitals still investing or are they looking at new deals? But before we talk about the future, maybe we should just talk about how all of you have spent time with your portfolio companies over the last 10 weeks or so and what are your expectations for the management teams of those portfolio companies during these challenging economic times? Jim Gunton, you want to kick us off?

Jim Gunton: Sure, Alan. Yeah, I mean, I think we've been fortunate in that we just started investing out of our most recent fund. And so we don't have as much of the complication than having companies with dramatic cash needs. We also make it a point to syndicate. So our companies for the most part are well-funded. Now that said, I mean, to your point, I think there's a couple of additional things to add. I think that both at the federal and state level, New Jersey has done a great job, EDA has programs that our companies have capitalized on, and of course the PPP. And I think the other thing is that I think companies are pivoting, and so just to get above the noise you need to have something that, especially if you're targeting the health industry, that makes it relevant for those customers.

Alan Wink:Thanks, Jim. Mark Volchek.

Mark Volchek:Stir. So, exactly as you said, the first reaction was let's work with our portfolio companies to make sure they're in good shape. So the first thing we were really focused on was runway, more than anything else. And obviously the situation is very different depending on the companies. We have a few companies that are doing extremely well that actually just were positioned for ... OneRail is a last mile logistics coordination platform. They've tripled revenue in three months. We have another company that allows at home video recording. They've doubled since December. They're on track to probably double again in the next 30 days. So, there's sort of the one extreme of the companies that just are well positioned for the situation we're in. And then there's other companies where revenue might be down 70% and we have to figure out how to survive.

But I think in all cases, and I think the most interesting conversations were those where things are continuing to go, sort of earn revenue, revenue's growing, but maybe not so well, and we're seeing some churn, and getting those CEOs to really take their crisis seriously and say, "How do we extend runway for 18 months?" Ideally 24 months just because of the uncertainty.

In many cases we were able to reduce some expenses by having programs for management to trade some of their salary for options. We had discussions on how to reduce maybe contractor expense, some other outsourced expenses that we were able to cut. And in a few cases we had to go through with furloughs or layoffs. And I think also in those middle cases, again, those were the trickiest, because the cases where a company is doing great, that's a great problem to have. The companies that have real, real issues and have short runways, there we're sort of in crisis mode, but even there we've been able to shore up all the companies either by doing a small insight around or cutting expenses, doing other things.

It's those middle companies where there's real risk and we can take this crisis as an opportunity to shore up the company, maybe part ways with some of the underperforming staff, and then come out of this stronger six months from now. But we've had a lot of conversations with our CEOs, that's really what we've focused on I would say for the month of February, March, and April really is starting to shift to sort of start thinking about new investments, new business, and new opportunities.

Alan Wink:Sean, how are you dealing with some of Osage's portfolio companies today?

Sean Dowling:Yeah, I think it's a pretty similar story. When the crisis first hit, we actually were both fortunate and rather unfortunate. We have our annual CEO event that was on March 10th and 11th, which was interesting timing to be able to bring our CEOs together. We had to end up doing it virtually. But just starting with, "All right. How do we just stabilize, make sure everyone can operate and keep their employees healthy and business continuity plans?" And then checking on cash runway and minimizing expenses and burn wherever possible.

I think over the past week or two, companies have started to shift from that really defensive survival mindset to a more offensive mindset and take advantage of the innovation that they're bringing to the market, their ability to be nimble, and to pivot and think about how do we emerge from this crisis stronger and extend our lead on competition. And so I think those are the conversations that we're going through at the moment. But like Mark said, the range of the possibilities vary significantly from company to company depending on how they're specifically impacted by the current situation.

Alan Wink:Elaine, from Greycroft's perspective, how are you guys dealing with your portfolio companies in these times?

Elaine Russell:Yeah. I think that Greycroft in general, we've taken initially a fairly conservative view right from the get go. And we have worked pretty extensively with a lot of our portfolio companies to cut costs right out of the gate. We've also done a lot of work around PPP with all of our companies. I think it's a case by case basis. We're probably going to talk about this a little bit more later on as well, and cash preservation. People also mentioned pivots when necessary. We've definitely been doing all of those.

I in particular in the Greycroft family have been a little fortunate. I do manage a portfolio that has a lot of grocery retail and stuff like that, which has, as you can imagine, been actually doing very well. But needless to say, I think we are working with all of our companies. Something that maybe is a little bit out of the norm that we have been doing with our companies as well is two different things.

One is we have been creating small group conversations and combining a few different, taken five to 10 portfolio company CEOs and matching them together, usually based on industry, for them to have live chats together and to kind of bring together those forces, because I think there's another whole underlying issue that we really wanted to confront, which is really around like mental health and making sure that our founders are supported during this time. So it's really almost like a support round table for our founders and CEOs. And so that's been really, really great for our founders to connect with other founders that are in similar industries, and probably seeing similar issues arise.

And then lastly, the other thing that we've also been doing is, especially on the consumer side of things, connecting a lot of companies that we think could have unique co-marketing opportunities during this time. This is a time where everyone wants to pull back their ad spend and pull back all their marketing spend, which we are proponents of, but we're investors in so many different amazing consumer companies. And so we have brought together some companies where they can do unique co-marketing opportunities together without the costs associated to it. So really just trying to create a family within our Greycroft portfolio companies where everybody feels like they have shoulders to lean on.

Alan Wink:Thanks, Elaine. John Frankel, I think you're back. How is FF Ventures treating their portfolio today?

John Frankel:So, one of the things we do, we're a highly engaged investor. And prior to COVID, we would organize 90 to 100 events a year in person, small groups, large groups, up to mini conferences. We've moved all that virtual and we're doing at least at a run rate closer to 250 events a year now. And because they're not in person, we're able to bring our teams in Europe and our teams on the West Coast and the East Coast into the same events. We're doing ones, like Elaine referred to Greycroft's doing, around mental health. We're doing them around areas, how to high touch B2B sales in a low touch environment. That's an example of one thing we've been doing. We noticed a number of stages companies went through.

The first week of this COVID was sort of like everyone was like deer caught in the headlights. Then people moved to furloughs, firing, freezing cost-cutting. Then waiting, and now they're in the mind frame to move forward and how do they grow the business from here? And we've been helping them. We've got the best practice at each stage of this.

On the PPP side, which people have mentioned, it's incredibly complex, there're a lot of tripwires. We've been trying to educate our founders around that and sharing best practice amongst them.

Fundraising, we're definitely getting involved with our companies that are looking to raise money, either leaning or falling on into rounds there. But fundamentally, we're probably more constructive than most VCs are out there about the outlook. We think that a number of our companies, a number of startups are naturally very defensive into a downturn where their customer is looking to cut costs because the solutions that the startups are bringing are ones which will enable them to cut costs and deliver higher efficiency.

So we're seeing across our portfolio some companies are doing very well, a couple that are cyclical with regard to what's going on. Each one of them requires a lot of time. So I would say the balance of our time has shifted more to talking with our existing portfolio than other things that we get up to on a daily basis. But it's very rewarding work, and I think any of the other VCs around here will tell you that it's very rewarding when you can really go in and materially help your portfolio companies.

Alan Wink:So I was going to ask this question a little bit later in our session, but since both Elaine and John brought up the question of PPP loans, maybe we should address it now. And I know there's been sort of a disagreement among VC professionals about whether VC backed companies should be taking PPP loans. So I want to ask the question of the experts. What is your opinion on venture backed companies applying for and receiving PPP loans? Elaine, you brought it up first, why don't you lead us in this?

Elaine Russell:Sure. So, from a Greycroft perspective, at the end of the day, I think my answer is just a case based situation. We have companies in our portfolio that we definitely believe should receive PPP. They have been materially impacted, and getting this loan is very important to them coming out of this still standing. And that being said, I think that we are probably a little bit more on the conservative side overall in terms of who does receive the PPP and we have internal counsel, our general counsel at Greycroft who's been very closely following everything. And as all good counsels do, taking a very conservative approach to it as well. So we are evaluating every company on a case by case basis.

If there is a question in mind, we probably would err towards telling them not to take it. And if they have an ability to repay it, that's also something that we have advised some of our companies that they can treat it as a low interest loan and use it to make it through this time and use it towards payroll during this time, but to plan on paying it back as they come out of it we hope on the other side.

So, a handful of our companies have received them I guess to wrap it up, but there have been many that we have recommended to not take it, and if they are on the border in terms of some of the things that people are really talking about, is like are they being materially affected, is their business materially affected, and that's obviously up for a lot of interpretation. But we have taken a little bit more of a conservative route to that.

Alan Wink:John Frankel, how about from FF Ventures perspective? Are your portfolio companies taking PPP loans?

John Frankel:So, again, it's case by case. I think the first thing to understand here is there are no experts in PPP. The guidelines are changing and will change over time, and there are a number of tests that you need to pass. We have independently done a considerable amount of work, separate from our portfolio companies, to see if we reached the same conclusion. We are making sure as all PPP loan recipients are doing, that we're having highly documented board meetings, memos, procedures, and the like, around this money. This is government money, which means it's everybody's money, that it's going into a given company as a loan and it needs to be accounted for appropriately. We do believe, irrespective of the size, any company takes it, that this is something that has to be dealt with incredibly responsibly.

That being said, I think PPP as a program, if it doesn't move much, if the goalposts don't move much from where they are now, is an incredibly beneficial program of injecting capital into companies that would let people go, furlough people, cut wages, and it's enabling them not to do that. And that seems to be the intent, it certainly was the stated intent, and the deliberations in Congress indicate that was the intent, and it's certainly how our portfolio companies would be looking to use it and document the use.

I would strongly recommend that for anyone coming up in a couple of months to the point of evaluating if they're going to ask for the loan to be forgiven, that they do another whole series of work around that point where we'll have more information, more data, and to evaluate whether that's an appropriate decision or whether the loan should be repaid.

Alan Wink:Sean, with Osage, have any of your portfolio companies applied and received the PPP loans?

Sean Dowling:So, directly, yes. I would say probably about a third of our companies or so. But again, very much facts and circumstances based for each individual company. And I think the most important thing is, as John said, to have a very robust and rigorous conversation at the board level to go through the various criteria. And I think there's escalating levels of decision-making you need to make.

One is the legal question of can you certify within good faith the language that's in the application. Then we've also thought deeply with our companies about more of a PR risk, like what's the reputational risk here, taking the dollars, even if you might have, by the facts of the law, met the requirements. We hope all our companies are successful. If they are five years from now, do we really want a report that says, "You took this money when maybe you had other means of funding yourself through this period."

But that decision is very much dependent on each individual businesses. And I would say for the companies that have received loans, it's meant to the intention of the law that they have not had to cut costs as deeply as they otherwise would have. And in a software business, 80% of those costs are people. And so to the extent that those funds are able to retain jobs, I think that was the intent of it, and it works for certain businesses that are more impacted than others.

Alan Wink:And Jim Gunton with Tech Council Ventures, I know you're a relatively new fund. Have any of your existing portfolio companies applied for PPP?

Jim Gunton:Well, I would say I think what Sean just said was well said. What I would add is that our prior fund actually was an SBIC. So we know the SBA well. And I think just philosophically, Alan, to answer your question, companies that meet the guidelines in my mind should pursue it. And we've done it for some of our companies and we've revised the documents to meet the need for minority representation among the institutional investors and that type of thing.

But I guess what we've found is that working with the community banks has been the best route for us for our portfolio companies that have gotten these loans. Banks like Peapack-Gladstone out here in New Jersey, Eric Waser has done a great job. And by the way, the other thing is I think somebody talked about the morality of taking the loan. So we've had companies that have given it back. They've been awarded and they've given it back because they felt that they were sufficiently well served and someone else could better take advantage.

Alan Wink:Mark with Las Olas, have any of your companies taken PPP money? So have they applied?

Mark Volchek:Yep. A few of our companies have, and I agree with everything that's been said so far. I think anytime you take any sort of loan, in particular government loan, there's a level of risk that comes with that. And I feel like in most of the board discussions, I'm sort of the voice of caution. A lot of the entrepreneurs feel like they need every help they can and they're obviously in the midst of going through the crisis. I think given a lot of things that I've seen in the last 20 years, particularly after the '08 crisis, a lot of those programs ended up being more headache than they were worth for some companies. So, we've really been the voice of caution for those companies that if they're at all in the gray zone, we really push them to not take the money. If they've been significantly affected and they really need the money, we are taking it, but then we're sort of saying, "Let's reevaluate in 90 days if we can give it back," because I do think in hindsight there's going to be a variety of risks and negative consequences potentially. And so by giving the money back, you reduce some of that risk. I think it's all about risk mitigation.

So if companies are taking the money, we talk about risk mitigation, proper documentation, and trying to give it back if possible as soon as we can because it's not just the audit risk from the SBA because we certainly all want to make sure that companies can meet the certifications that are required. The bigger issue is potential class action lawsuits. We've already seen some of that pop up against some of the bigger companies. And so I think there's all kinds of abstract and real risks. And so we're focused on those because often the entrepreneurs look at all the upside. And so I feel like my role in the boardroom is to make sure they understand the downside of the risk of taking the money.

Alan Wink:I think that's great advice, Mark. It's funny, I actually was reading in the Wall Street Journal late last week that even the board of the National Venture Capital Association was on the fence in terms of providing guidance whether VC backed companies should take PPP money or not. But it sounds like most of you are accepting the money and moving forward. At this point I want to hand it over to John Pennett who's going to continue the discussion going, talking more about the existing investment climate. John.

John Pennett:Thanks Alan, and welcome everyone. So, one of the questions that we heard quite a bit as we were thinking about putting this panel discussion together is everybody wants to know if VCs are investing in new companies today. When you look at your capital today and you look at the present economic uncertainty as a result of COVID-19, how do you expect to divide your investment, your capital, between existing portfolio companies and maybe looking at new investments? So, Sean from Osage, would you start us off on that?

Sean Dowling:Sure. So, I guess we're in the fortunate position as a fund to have just launched a new fund in January. And so we have, in our current fund, we have no existing portfolio companies where we have to make that tradeoff between directing dollars towards new investments versus existing portfolio companies. So we're very much open for business looking to deploy capital out of this new fund and entirely focusing that capital on new deals. Clearly for our existing funds, we always reserve for follow-on investments and we're making those decisions as to how to allocate those reserves to the companies that have the most promise and have the greatest need. But thankfully for us, we don't have to make a tradeoff between those two.

John Pennett:Sounds like you're lucky. Jim from Tech Council Ventures, what do you think?

Jim Gunton:Yeah, I think, John, that we're actively looking for new opportunity. So we just recently raised our capital, so we're eager to put it to work.

John Pennett:Terrific. Mark.

Mark Volchek:Yes. So we're in a similar situation to Sean that our fund one, all the remaining capital will go to existing portfolio companies, and we are looking for new opportunities for fund two. So that is really not an issue for us. I think the bigger question that I think many funds struggle with in a normal environment, and it's more difficult now, is how do you balance between putting some of that reserve capital into our best companies that are actually doing great through the whole crisis, versus using those reserves to help companies that sort of needed to get through or to survive.

And I think traditionally, I think the wisdom is putting the reserve capital to the best companies because that's where you get the best return. I think this is sort of a little bit more complicated because we have the short term dislocation and everyone's wondering how short term is short term and how much capital will make an impact. So there's all kinds of new more difficult questions and that sort of allocating between portfolio companies over follow-on, and it's not all going to happen in days anyway. For us, most of that will get deployed over the next 12 to 24 months. So there's sort of many phases to that decision. But I think that's where we've been thinking more about how to evaluate that and make that decision.

John Pennett:So Mark, when you think about that, are you kind of thinking about it as companies maybe pivoting to whatever the new normal is going to be in the future and how companies are able to change and maybe are you sort of having to become more of a forecaster of the future in making those decisions?

Mark Volchek:Well, I think as a venture capitalist, you're sort of always a forecast of the future because we're investing at a stage where we hope somebody is going to be 10 or 100 times larger than they are today. That said, I think at the first level, it's really around identifying the companies that are doing great because there's sort of the acceleration of work from home. And a lot of the trends that we believe we're going to play out any day over the next five years, are now playing out much faster.

So some of our ... One company for example that is in the last mile logistics management, we believe that was a trend anyway. People are going to buy more online, people are going to buy more e-commerce. Well now that's happened, that acceleration has happened in 30 days or 60 days instead of three years or six years. And so that to us is sort of like a huge opportunity, and they need a lot of capital because they have so much demand they're trying to double their staff by the end of June.

So that's sort of a different problem than the company that was doing great, but now has had a pause in demand, and we don't know when the pause will end, and that's sort of I think the bigger question. They also have a need obviously because they need to get through this. So those are sort of the two things we're really trading off.

John Pennett:Terrific. And Elaine, I assume that you're probably seeing sort of the same type of things with respect to sort of food and grocery type of industry as well, correct?

Elaine Russell:Correct. Yeah. I mean, there's a couple of different things going in different directions I guess at Greycroft. We have multiple funds, so we do look at things a little bit differently based on which fund it would be a fit for. We recently closed our growth stage fund three and so we are actively looking in there. We have our fund five, which is core usually Series A investments. And then we have our Albertsons Fund as well. So we are actively investing.

I think that as multiple people have mentioned, there is always a discussion around how much funds should be allocated to portfolio companies. And also like someone mentioned, the ones that are really excelling right now versus the ones that need capital for other reasons. So that is an active discussion everyday right now.

But just generally speaking to answer your question, especially from my fund perspective, from the Albertsons Fund perspective, we are actively investing. We do look for companies. Our thesis for this fund is thriving right now. It is online retail and software that enables retailers, those areas are really doing well. But there are certain things that we are looking for in companies that are a little bit differently than how we used to look at them before. There's a couple other hurdles people need to jump through at today's day and age in order to kind of qualify in our mind as a company that can not only be successful, but get through the recessions that we're experiencing now and we don't know how long we will experience going forward.

John Pennett:Perfect. Thank you. And John from FF, how are you thinking about dividing your capital deployment between existing companies and new companies?

John Frankel:So, we're investing out of our sick funds. So, that's actively investing. We have 76 portfolio companies. And so we have a lot of energy we're spending on prior ones. Some of our funds are fully invested, others have some capacity. Look, this whole question of how you invest on follow-on, how you do it, is a huge area that probably takes a couple hours to really investigate. So let's not talk about that. Understand like VC's capital allocation is kind of what you're paid for.

The way we think about the US economy is there's say a dozen economies. There's the all economy, there's the hospitality economy, there's the food delivery economy, there's the B2B SaaS economy, you split it up that way. When you look at it, there are definitely winners and losers. I would say over the last few years, we've seen a tremendous number of hospitality related startups. We've avoided investing in them. We're fortunate we avoided investing in them because that's probably a ... And honestly, if there's an entrepreneur listing now, that's looking to do something in hospitality, it better be amazing to get people's attention.

One of the themes that we're seeing here, because this is driving how we're thinking, we think the value of public space is going down relative to value of private space. Shared space is really interesting. Now is probably a really good time to be starting a WeWorks, not actually having a WeWorks. When we look at digitalization, everything that we've invested against, the move from analog to digital is accelerating. And so that's benefiting a lot of our companies. Companies that enable their customers to do things at 110th the price, when in the boom years it kind of got people's attention, now they should very much get their attention. So, that's something we're looking at.

Logistics are important. Education is an area that's intrigued us a lot. We picked away around the edges of it. We're in a company called Bloomz, which is parent-teacher-student communication, and their business is just exploding as you can imagine. School systems really want to be able to replace the outdated systems out there and they're offering it for free for the next six months to a new school system that comes onto their platform. So that's just blowing up large, and there are companies against that.

The areas we liked coming into this were AI, applied AI in particular, drones, robotics, and FinTech. We still like that space. We're in a robotics company out of San Antonio, which deals with the picking and packing of envelopes for large movers of goods. So, can't name anyone, they're under NDA, but clearly having robots doing this as opposed to people coughing over each other is probably a good thing. We're in a company out of Dublin that does drone delivery of, well, a month ago, burritos to students, now with hundreds of active flights a week medicines to seniors.

So to us what's so key is how are entrepreneurs, how are founders, how are teams, are looking at the new world and facing off against that. We're still seeing enormous numbers come. We normally see about 50 companies a week. Last week we reviewed 65. That being said, everybody, I think, and this is generally, and this is just a general piece advice, everybody's in a bad mood. Treat everybody as if they're in a bad mood. So when we're reviewing deals, I think people's attention span, which I used to describe as that of a four-year-old, is even less.

It's the Blockchain real estate investing, like we're just not going to get to the third word. It doesn't intrigue us as a space, but logistics are very interesting. Areas, as I said, around applied AI, drones, and robotics, capture our attention. We have a couple of deals we're working on right now for our fund. We have a number of our existing companies raising money where we're going to be more money in, and it's an exhausting time. I think our staff are physically exhausted with everything they're doing, and I'm sure a lot of people are. Working from home actually involves working.

John Pennett:Yeah. Thanks. Thanks for the insight and thanks for not sharing your secret sauce about capital deployment there. We don't want to spoil your specialty there. Thank you. So I want to kind of ask a question about, and John started it a little bit there, but maybe Mark, I'll ask you to pick it up from here. So what is, as a result of what's happened here in the current environment, what's changed about your attitude, if anything, towards new deals? Are you able to do virtual meetings with entrepreneurs and can you actually close a deal without actually spending that face to face time and really getting to know an entrepreneur well before you invest in a new company?

Mark Volchek:Yeah. I think the first step is clearly we've always done sort of a lot of our screening and often the first meeting/call remotely. So that really hasn't changed. We've actually been seeing lots of opportunities where over I think the last four weeks, the run rate of opportunities we're reviewing is up like 30%. I think last year we looked at 1,200 and this year we're on track to get like 1,500 or 1,600 if this continued throughout the whole year. So I think that first step hasn't really changed. And if anything, we've been more efficient because we're all working from home. We're not traveling, we're not doing conferences. So in some ways there's a lot more time to do the core functions of working with our portfolio companies and reviewing inbound and reviewing referrals and other things.

I think the question on can we actually close the deal without ever meeting the founders and the team, I think it's still to be seen. I think we're ... We just closed sort of our last investment in February [inaudible 00:45:46]. Luckily that was a logistics company that's been doubling over the last 60 days. So we're fortunate there. So on our pace, we were doing about one investment a quarter. So even if we're starting the process today, process for us genuinely takes between 60 and 120 days from that first call to actually make an investment. So that kind of puts us already into Q3. So we're kind of trying to figure out, if the world doesn't go back to being able to have in-person meetings fast enough and we do have an interesting investment we want to make, how do we satisfy all the things we used before? Because the in-person component was important for us.

We try to evaluate team dynamic, we try to evaluate how do founders react to certain things, and that's really hard to do via Zoom because people aren't in the same place, are not working together, it's very hard to observe how they work together even though some of that you can get through Zoom meetings.

So I think for us that's an open question. We're hoping that we'll be able to have some sort of in-person meetings kind of by Q3 sometime, in time for closing maybe that next deal that we're working on. But it's still hope for us.

John Pennett:Okay. Terrific. Thank you. Elaine, what's your view on that?

Elaine Russell:Yeah. At Greycroft we have a little over 250 portfolio companies and we are pretty active. We make, I don't even know what the number is, but many investments per quarter. So I think the, right when this hit, we've talked about this internally and I think that the reality is that, yeah, we will be making investments without ever meeting a founder face to face, which is crazy to us. It's not how we normally do business, but we are looking to adopt now.

We actually, crazy enough, just on boarded our first hire that we have never met in person. So, we've officially hired a team member that will technically be in the New York office, but it doesn't really matter what offices he's in today, without ever physically meeting them.

And so I think that there is a certain personality that meshes well with virtual meetings and being able to kind of connect with people through a webcam, really takes a special person. So there might be some founders that are at an advantage because of that, because they just have this personality where they are able to just connect with people, whether that's in person or through a webcam. And then I think there might be some people that are disadvantaged, both for raising capital and also for getting jobs that maybe are a little bit more introverted or whatever it might be. This might be a founder that we would typically still potentially invest in because we're seeing their skills and their capabilities, but we're maybe unable to fully grasp that through a virtual meeting.

So, I think that from Greycroft's perspective we will have to make investments without meeting somebody. That's the reality of today, and we will do that. It's going to be difficult and I think that it'll provide a slight advantage to some people and a big disadvantage to others. And so we will see how that shakes out, but it's certainly the new reality.

John Pennett: Okay, great. Sean, Jim, I don't know if you have anything further you want to add to that. Sean, you want to start off if you have anything to add?

Sean Dowling:Yeah, sure. So the answer is yes. So we actually have a company under a term sheet right now that we haven't met in person. And we were in, as Mark said, the early stages of engagement usually happen remotely anyway, and we were scheduled to meet them in person in early March, and obviously that didn't happen. And so we've built a relationship over Zoom and I would say that it's been an interesting experience.

We've tried to increase, I think it's enabled us to increase the number of interactions we're able to have if we're not having to go travel and schedule is getting in the way of that. We probably have doubled the number of Zoom interactions that we would have had relative to what we would have done in person. And I think it's also made us realize that it's almost certainly that intuition of how you read the intangibles like team dynamics in a particular culture are much more difficult to assess in this sort of environment.

And so it's like losing one of your senses. You realize you need to pick up the gaps there by exercising other senses in stronger ways. And so relying a little bit more heavily on data and increasing just the maybe things we would have intuited otherwise or asking more directly at this point and trying to gather that information in other ways that are no longer possible or feasible to do.

But it's something we're thinking deeply about in terms of how do we replace the person to person interaction, ability to read body language and all those other sorts of things that are crucial to our jobs, because we're investing more than anything else in people, you really need to be able to build that trust and appreciation for their skills, and that's hard to do remotely.

John Pennett: Okay. Jim, any final thought on that topic?

Jim Gunton:I think the question has been answered.

John Pennett:Good. Okay, great. So I'm going to ask each of you to give a relatively short response to this question. In this challenging time, what are the three points of advice that you would give to an entrepreneur that is trying to raise money? So, John, we'll start off with you.

John Frankel:The first thing is understand the investor you're going after. Look at our portfolio, it's on our website. If we're competitive, don't engage with us. If it's the wrong stage, don't engage with us. If it seems to resonate with what we're doing, please engage. So that's number one.

Number two is understand that if it's in an area that's going to be particularly badly hit right now, then it's probably not the right time to be raising capital for what you're doing, or you're going to find it just much more difficult. VCs tend to sort of move in the now to fashionable groups. Hardware has been out of fashion for a few years, may stop coming into fashion a year or two. Two years ago, three years ago, chatbots, lots of capital. Today, very little capital. So understand that dynamic.

Where we invest, it's the same as every other VC, we're looking for teams that we really like and that we resonate with, and we look for businesses we think that can be multi-hundred million dollar businesses if executed to scale.

For us in particular we like a business model as well, not just an eyeball model, but again, try and learn your investor. And the warm intro, always better. We accept warm and cold intros, but I would tell you almost all of our investments in our portfolio have comfortable warm intros.

John Pennett:Terrific. Thanks, John. Jim, your thoughts? Three points of advice.

Jim Gunton:Yeah. I guess the three points, John, would be these. One is that you want to have multiple different conversations ongoing. I mean, listen, this is obviously a difficult time to be trying to raise money, but it's always hard. It's always hard. I remember in the late '90s, I was with a group that had three prior funds, all which had done extremely well. One of my colleagues was the president of the industry at that point, and we had to reach out to 1,500 different potential investors to get 15. So, it's always hard. But if you have multiple balls in the air, I think that's a good starting point.

I think second, and I said this at the beginning, which is that you need to adapt your message, right? The reality is that we do have COVID, we do have climate where being virtual and being online is an advantage. So I think most entrepreneurs are smart enough and do that, but I think to adapt, I think that's a big deal. It needs to be part of your material and part of your message.

And I think the third suggestion, John, would be that I think that money comes from relationships. And so I look at it as concentric circles. You start off with those that know you best, whether it's friends, family, colleagues, whatever it is. And then you have to go further away. And as John mentioned, you can get warm introductions. But yeah, you definitely want to start where the relationships are the strongest.

John Pennett:Terrific. Elaine, what are your three points of advice?

Elaine Russell:Yeah. So, my three points, which would be sort of on top of the typical fundraising, this is sort of the unique advice for today's day and age I would give you is, one, we want to look at your cash efficiency. So I want to make sure that you know how to manage your cash and that you're being efficient, especially during today's day, but just showing that that skillset is present. I want to make sure, I mean, this is sort of mentioned, but the problem that you're solving is relevant. Relevancy is changing and of course nobody can completely tell what the future is going to look like, but the problem that you're solving needs to be, at least in your mind and you need to try to convince us that it is definitely relevant in the near future.

And lastly, the advice I would give is just, this kind of goes back towards being Zoom friendly. We're going to be talking a lot through the computer, and so a piece of advice would be efficient with your words. I want to understand exactly what you're building and what the value you're creating is very quickly. People's attention span in person is a little bit longer, but when you're talking to someone via a computer, it's even shorter. And so be efficient with those. And again, it kind of goes back to building that relationship. I know it's harder, but we do need to feel a connection to the team and especially the founder. And even though it's through Zoom, we still need to build that connection.

John Pennett:Terrific. Thank you. Mark.

John Frankel:Can I add an amplification on that point?

John Pennett: Sure. Go ahead, John.

John Frankel:We used to, a lot of our first meetings with founders would be via a telephone call and we would avoid doing video. Post-COVID, it's all video and then it's just a phone call it's much less connected. And it reminds me in the early '90s when voicemail first came out, how people hated leaving their voice recorded. They didn't know how to do that on a telephone system. They felt they were onstage. I think everybody now, and certainly in our business, is learning how to broadcast live. And video recording and video communication is just becoming the default. And I think that will probably survive when we can have real face to face interaction. So I think it's a big change. And it is fascinating to me that Zoom has dominated where something like Google Meet should have.

John Pennett:Right. It's a good thing I took those acting lessons, right? Mark, your three points of advice.

Mark Volchek: Sure. Yeah, and a lot of what I'd say was already said, so I'm going to try to add some other points. I think in general the advice hasn't changed that much, so I'm going to try to focus on what may be a little different. Fundraising and fundraising, and so the fundamentals are still the same. Investors are looking for the big opportunities, the team, all those things. But I think what has changed, is the first piece of advice I'd give, is don't raise right now unless you really have to. It's not a great time to raise money. So unless you have to, or you have sort of an unbelievable opportunity that you really need to fund right now, why not wait a few months? Because even if you are able to raise money right now, you're likely going to have less options, and worse terms, or some other thing. So, don't be in a rush. That's sort of the second part to that don't raise now.

So if you are starting to raise now, we've seen people who are, "We're trying to close a round by the end of May." Well, we don't write checks in 30 days from the first email we get. So that's not going to happen in a normal environment and even less today. So I think it's really important to think about timing and why you're raising money right this second and is that really the best time for you.

The second piece is targeting is even more important than normal. I think entrepreneurs generally, many entrepreneurs don't do a good job targeting the funds they reach out to, and I think that was already said. It's really important to understand what VCs are looking for. If we get an investment that's B2C or packaged goods, we're not going to invest in that. It's just not what we focus on. And so it's really important to target and build the relationships with those 10, or 20, or 30 funds that you think are perfect targets for you.

And then third is adjust to the process. Try to understand that investors are sort of creating new processes, and it's really important for entrepreneurs to cater to that. I mean, I've had a few things in the last week where I will send back a bunch of follow-on questions and the entrepreneur will respond and say, "Well that's already covered in the deck." Well, it doesn't really help me because I'm asking you because obviously it wasn't clear, or I didn't see it, or I didn't find it. So it's really important in this virtual environment for entrepreneurs to understand that they're selling and investors are struggling to get the same information they used to get.

And so I think entrepreneurs that can adjust to that and have a clean data room, have a really good deck, present relevant video. We've had a number of entrepreneurs pitch to us and not turn on their video, which is awkward. If I have my video on, I expect their video to be on, and I think that's important. And so I think as an entrepreneur, processes for investors have changed and adjusting that and adapting to that, and being that entrepreneur that can take advantage of this situation, rather than that entrepreneur who doesn't come across on Zoom and can't raise money. So, I think that's the quick ideas.

John Pennett:Yeah. So Sean, being the last one on a question like this, so we're up to points 13 through 15, if there's anything new you want to add, or if you think we've got it all covered, we could certainly move on.

Sean Dowling:Yeah. I think the fundamentals of raising money aren't changing, and I think that's what a lot of people have highlighted. And if anything, certainly the bar has gotten higher on those fundamentals. And so I would say maybe the one thing that hasn't been said, given we focus on B2B software, the question we always ask is, is this a need to have or a nice to have. I think being able to answer that question really crisply and demonstrate this as an ROI driven decision that your buyer is going to be making, and we can, here's the business case and here's the ROI that we can deliver our customers, because that's going to become increasingly important, I think is one thing.

The other I would say, totally echo Mark's advice, to try not to raise right now if you can avoid it. If you have to raise right now though, I think you need to be realistic. I think coming in and saying, "This is going to be a one-quarter blip and our growth rates can go back to what it was starting in Q3," is just not the way the world's going to work. And I think being conservative in your growth projections is better in this circumstance, and consequently your spending plan is better in the circumstance than what entrepreneurs sometimes try to do, is say, "We're on this rocket ship that's going to go forever." I think entering into an investor relationship with a much more realistic mindset about how the world is going to evolve is increasingly important today. And I think that comes to both how much capital you're going to raise, how quickly you're going to deploy it, and how fast you think you're going to be able to grow.

John Pennett:Terrific. So it's credibility in terms of those projections and then probably credibility and expectation in terms of evaluation as well.

Alan Wink:So John, I guess we're kind of coming to the end of our webinar. I want to be respectful of everyone's time, but just one real quick question for each of the panelists, go around the horn for the lightning round. And it sounds like you all are still investing pretty actively today. If $140 billion was invested in venture backed companies last year, what's 2020 going to look like? How much VC money will be invested? Real quickly around the horn, John Frankel.

John Frankel:90.

Alan Wink: Elaine Russell.

I would say 30% less probably.

Alan Wink:Sean Dowling.

Sean Dowling:I'd say 100.

Alan Wink: Jim Gunton.

Jim Gunton:I think it will still be comparable.

Alan Wink: And Mark Volchek.

Mark Volchek:Yeah, I think it'll sort of be down about a third to a half.

Alan Wink:So once again, I think you now have some predictions for the future. I want to thank each of the panelists for disrupting their busy schedules to join us this afternoon. And once again, from everyone at EisnerAmper, I want to say thank you and hope everyone stays safe and sound and good luck making it through this. Thank you everyone.

 

About Alan Wink

Mr. Wink assists clients with capital budgeting, capital structuring and capital sourcing. He has worked with many tech and life science companies on developing the appropriate capital structure for their position in the business life cycle.

About John Pennett

John Pennett has public accounting experience with a strong emphasis on life sciences companies. Member New Jersey Society of Certified Public Accountants and New Jersey Technology Council and advisory board of eLabs.

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