Category: Philosophy

Leadership for the Pandemic and the New Normal

The COVID-19 Pandemic has caused every startup to assess how to survive and plan to thrive in the “new normal.” No one knows what the new normal will look like, but based on other jolts to our economic system, we do know that life after this pandemic will be different than life before – at least for a while.  Just as there is no natural immunity to the Covid-19 virus, there will be no immunity to the economic disruption that results.

As I previously posted (see http://blog.drosenassoc.com/?p=140 and http://blog.drosenassoc.com/?p=145), startups need to act  while they can to survive, pivot (as appropriate), and figure out what unique things each business can do to solidify their future.

This is a test of leadership. 

Most angels cite the team as number one thing they look for in their investments.  The critical role of dynamic leadership is more important in this time of unprecedented upheaval and startup survival threat. 

Founders and CEOs must maintain team enthusiasm in the face of societal and personal hardships now more than ever.  While maintaining team cohesion, startup leaders also need to motivate their investors to stick with them and subscribe to their changing vision.  Both founders and their investors are in this to create great companies that lead to great exits.  Ultimately future investors and acquirers will judge and value the enterprise based on how well it adapts to this new normal.  But, of course, there is no company to value if it runs out of cash before it gets to an exit.

As I’ve spoken with many startup CEOs, I’m finding that they seem to fit into one or several of four categories.  These are:

  1. Immediate action.  These CEOs (generally guided by either their own experience or that of an experienced CFO who has experienced previous downturns) see that cash must be conserved with a potential path to becoming cash flow positive.  They tend to involve their entire employee team into the conversation and take rapid action to conserve cash.  They often have a company that already has some cash flow, so balance the reduced cash flow with cuts to stay alive and potentially thrive.  Given that cash balance is finite, early cuts have a bigger impact than later ones; this is similar to the response to Covid-19, where earlier actions seem to have more effect in preventing widespread infection.
  2. Benefit from the “New Normal”.  There truly are some business that will benefit from the disruption.  A clear example is Zoom, which is blossoming as we all need to move to videoconferencing.  Or, one of my portfolio companies, DocuSign that has enabled transactions to still be done virtually.  Some clever entrepreneurs have quickly pivoted to provide a piece of critical infrastructure for businesses to reopen safely. 
  3. Wait and see.  Some CEOs decide to wait to understand how bad their situation will be before taking action.  They might have considerable cash in the bank – they believe sufficient to weather the storm.  And, guided by their prior experience, believe that when cash get low, they will have achieved milestones that allow them to raise more cash.
  4. Denial.  These CEOs believe that, while things look bad right now, their business will turn around and go back to the way things were before.  In some cases, they were in the middle of raising institutional money and believe that the money will come (it might).  In some cases, there is a logic that says if every one of my competitors cuts back, but I continue to move forward, then I will be the biggest winner when the market does turn.  There are probably some businesses that will do well in the “new normal” but I doubt that it is as many as think that they will do well.

The purpose of the above discourse is to point out that there are many different paths to leadership in this tumultuous time.  No one path is always correct, and most leaders will use some elements of more than one.

Over the next few weeks, I will talk with leaders who I believe, through their actions, have demonstrated exceptional leadership in the face of what could have been a company destruction.  I believe that their examples will serve to illustrate why we invest in startups and be a guidepost for others to adopt best practices.

How Angel Investors Survive the COVID-19 Economic Crisis

Blakiston Owl: We need the wisdom of an owl in times like these. (c) Rosen Photo

Author: Dan Rosen

To: The Angel Community

After publishing my companion piece, “How Startups Survive the COVID-19 Economic Crisis,” I have received a number of comments about how this impacts angels and angel investing.  Here are my thoughts.

Unlike VCs, who have a fund to invest and collect a management fee for investing their fund, Angel Investors invest their own money and are under no pressure to invest in any company or at any time.  Our decisions to support a startup are totally our own.  As in previous market downturns, there will be some themes that help us through our investment decisions during the COVID-19 pandemic and the resulting economic crisis.

Angels have limited funds.  And many of us already have extensive portfolios.  We quickly will be (or already are) in the position of getting funding requests from many of our portfolio companies for new rounds of funding.  Some will make it, and some won’t – even great companies with fabulous ideas will fail when the cash dries up, and sometimes Angels alone can’t provide sufficient cash to carry them through.

For Angels, this is a good time for both investing and tough love.  Great companies are often started in market downturns.  I believe this is because only the most dedicated entrepreneurs (the ones that feel absolutely compelled to create their new company) will leave a stable, good-paying job in the middle of a downturn.

My friend and colleague, John Huston of Ohio TechAngels, commented on the last two recessions: “One strong recollection I have of those periods is that CEOs (with a strong BOD) who most effectively & frequently communicated their parsimonious plans to use the emergency funding were helped and survived.”  An inexperienced entrepreneur might neither have the experience nor the tools to manage their impending company crisis; we as knowledgeable Angels and mentors and board members can draw on the experiences we have faced as investors in those previous cycles.  It is our hour to shine and help our startups survive and thrive!

Here are my rules for Angels during this downturn:

  1. Stay in the Game.  I know that our public equity portfolio is way down, but, most likely, you aren’t bailing out while the stock market is down.  Same is true of Angel investing.  Stay in the game.  Keep reviewing companies, meeting with entrepreneurs, etc.  And be prepared to invest in both some of your existing companies and some new ones.
  2. Be highly selective.  Most Angel investors are always selective, but this is the time to turn your filter even higher.  Funding is even more limited than it was a few weeks ago.  There will be lots of great opportunities, both in your existing portfolio and new ones.  So, take your time and invest with care.  The funding requests will vastly exceed your ability to invest!
  3. Work in a group or a team.  Angel groups (or groups of Angels) can help a lot, both in terms of assessing deals and in making sure that there is a sufficient pool of capital and expertise to help companies succeed and thrive.  In stressful times like these, this is even more important.  The Alliance of Angels has survived the 2000 (dot com crash) and 2008 (mortgage crisis) downturns, with a group IRR of over 20%.  Angels and the startups they support can really benefit from that institutional wisdom.
  4. Be ruthless.  All Angels investors have their favorite companies.  We want them to succeed.  This is the time to step back and realistically consider the probability of success with limited financing.  Advise your existing companies to conserve cash and focus on how to help their customers.  (See my companion piece.)  You may think you are helping by keeping a portfolio company alive, but make sure that their plan is reasonable to actually survive – tough love.  Some of your portfolio companies will not survive – even great companies will die from running out of cash and runway.  But it is likely that some good ones will come through this crisis even stronger and give a better return than you expected.
  5. Multiple financing rounds.  This is a time to avoid companies whose plans require multiple rounds of financing with large cash needs before they can turn cash-flow positive.  I’m not saying to sub-optimize the outcome of great companies.  But for at least quite a while, it is likely that cash will be tight, and it will be difficult to raise money.  Companies that are frugal and can make the most out of the Angel cash have a much higher probability of giving you a return.
  6. Deal terms matter.  This is a time for resets.  Both Angels and entrepreneurs need to reset expectations.  The world will recover, but it is likely to take a while, so make sure that the terms on which you invest are in synch with the market and the projected future.  Resetting valuations to match today’s reality is a must.  If you agree to too high a valuation, the company will have trouble both attracting enough investment now and, particularly, more investment at the high post-money valuation later.  Watch for other terms, like liquidation preferences, that can lower your return.  And, for a less experienced CEO, do not be afraid to have some protective provisions, e.g., the company can’t exceed its budget without the approval of the investors or investors’ rep.
  7. Be careful, but not greedy.  As Angel investors, we invest for the future and to give back.  It is OK to be careful, ensuring that the return you get is commensurate with the now higher risk you are taking.  But don’t be greedy and ask for large multiple liquidation preferences, too much of the company, or asking the entrepreneur to throw all their energy into the company without retaining a big enough stake.  This is a time when we want a “rising tide to raise all ships.”  We are in this together.
  8. Exits.  In the short term, not many exits are likely to occur.  Unlike VCs, Angels can do well with modest exit valuations (provided that the initial valuation was in line with reality).  Entrepreneurs can also do well with a modest exit.  Make sure the entrepreneurs in which you invest are on the same page – look for early exits, even if they are more modest.  You want entrepreneurs who want to be rich, rather than becoming a king!

We are in a challenging period.  It is natural to want to pull back.  As an Angel investor, this can be a good time to both maximize your current portfolio and find some new fantastic deals with fantastic teams at reasonable terms.

Trophy Hunting – I just don’t understand

Like many animal lovers, my first reaction was outrage at the senseless death of Cecil the lion by Walter Palmer. I let my first draft post that reflected my outrage subside into thought – I just couldn’t understand why a successful American dentist would feel the need to take the life of a beautiful African creature. Then I learned that he has done it many times in the past and that big-game hunting has supported the imperiled species to be taken to the brink of extinction, where the lion population has decreased from over 100,000 in the early 1990s to between 15,000-47,000 currently (ref: Wikipedia). The justification is that “trophy hunting” is a smaller factor than poaching. To me that is a specious argument, since it exacerbates the rapid decline of these magnificent creatures. Paying $50,000 to slaughter, behead, and skin a lion is unfathomable and should be condemned.

Our society has moved beyond this! We should not tolerate this. 2000 years ago, hunting and killing humans was considered acceptable. Army’s would plunder captured villages, beheading humans and displaying their heads on spikes or hanging them from walls. As our society matured and became more civilized, this was condemned and is considered abhorrent. ISIS still maintains this practice in their conquered territory – they considered conquered people trophies and not deserving of any compassion.
Are big-game trophy hunters, like Walter Palmer, very different from them? Future generations of humanity will look back on the barbaric practice of trophy hunting with disgust, just as we should now.

So, what should we do?
1) Clearly, the first step if for all civilized countries (led by the US) should put in place a permanent ban on Trophy Hunting; no part of a threatened or endangered species should be allowed to be brought back into the US or any other country.
2) Social pressure, like that shown to Walter Palmer, must be ferocious. We should shun anyone who does Trophy Hunting. Peer pressure should be massive. They should understand that this is as unacceptable as being taken to a remote location to hunt a human.
3) Economic stick. The countries that allow Trophy Hunting should face economic sanctions if they continue to do so. These include not just Zimbabwe, but also South Africa, Namibia, etc.
4) Economic carrot. We need to support non-destructive ways to preserve wildlife and their environments in the affected countries. I am a photographer and love photographing animals in their natural habitat. Photo trips like these are expensive and support the local economy. I also contribute to wildlife conservation. As a society, we need to make sure that preserving these natural habitats and their wild inhabitants is a high priority.

Let’s make sure that Cecil’s senseless killing was not in vain. #CecilMattered

At the Clinton Global Initiative – CGI America

I recently participated in the Clinton Global Initiative that was held in Chicago on June 7th and 8th. It really was a fascinating event in many respects. The agenda can be found at: http://www.cgiamerica.org/2012/agenda/. The basic thread was what specifically can be done to put America back to work. There were a slew of great speakers and breakouts. I was invited to help guide the Entrepreneurship sessions.

Dan Rosen & President Bill Clinton

It is impressive to see what former President Clinton can get companies and individuals to do – there were specific commitments to create programs, hire returning veterans, and great discussions and commentary about what has gone wrong and what can be done.

Several highlight comments:

  • Bill Clinton talked about the need for “creative cooperation” instead of the partisanship that is choking our political process.
  • He also talked about transforming our society to one that is sustainable, citing Costa Rica which has 26% national parks, is 51% forested, and has 92% of its energy (going to 100%) from renewables. He saw this model as a challenge model for the US.
  • Fareed Zakaria had a memorable quote, when saying he didn’t have a PowerPoint: “People who use PowerPoint rarely have power and never have a point.”
  • He then discussed the impact of two concurrent revolutions – globalization and technology – and how they are a “pincer movement” on American employment, where the American worker is stuck in a bad place, because we have had a divergence of capital and labor.
  • He cited that most countries have a cabinet level position to enhance tourism (“every tourist is a walking stimulus program”), where the US has a cabinet level position to prohibit tourism.
  • Rahm Emanuel, the new mayor of Chicago, cited the need for cities like Chicago to stop looking to Washington, DC or Springfield (the Illinois state capital) for help or answers; “the reinforcements aren’t coming.” He talked about programs he has done locally to help the city and employment in public-private partnerships and how he has gotten the cooperation of the unions.
  • He also made some interesting global comments about the economy. Apple, one of our most successful companies by any measure has over $100B in revenue, but only employs 40k people in the US. But, Foxcon, which make many of its products, employs over 1M people, primarily in China, to build Apple’s products.
  • Clinton: “I was just in Silicon Valley meeting with business leaders. I was told that, if we had the workers with the right skills, we would hire 3M people.” This was a segway to discussion about education.
  • I was really impressed by Ai-jen Poo, Director, National Domestic Workers Alliance. He spoke eloquently about the need to change both models and training in financial education. Paraphrased: “today the role models in disadvantaged communities are drug dealers and rap stars. They are successful and rich. We need new role models that bring financial dignity and literacy. Today, in these communities, you have liquor stores, pawn brokers, payday loans, and drug dealers. If you could raise the average credit score from 500 to 650, then you would transform them to convenience stores, credit unions and banks, and thriving businesses. This requires making “smart” sexy. And teaching and giving financial literacy and financial dignity.” Truly inspiring.
  • Clinton (in his second keynote) talked about Lincoln. In the teeth of the Civil War, he did the following:
    • Created the transcontinental railroad;
    • Created the National Science Foundation;
    • Chartered the land-grant universities
    • Others…
    • And wrote the Emancipation Proclamation.

    He was clearly in the “Future Business.” This is what we need now!

  • Kasim Reed, Mayor, City of Atlanta, said: “Being a mayor is where hope meets the street. It is a question of will – doing the right thing even when the cost is high.”
  • Another passionate and brilliant speaker was Neil deGrasse Tyson, Astrophysicist and Director, Hayden Planetarium, American Museum of Natural History. He said (paraphrase): “Getting students to study the hard STEM topics is more a question of inspiration than knowledge. We need to inspire our youth.”

The only downside for me was the seeming confusion between lending and equity. There was much discussion about helping small business and a lot of confusion about loans as investment. We angels have our work cut out for us.

The Economic Crisis

A while ago, I blogged on the decline of Microsoft (http://blog.drosenassoc.com/?p=42). Lately, many people have asked me about the current debt crisis, followed by the S&P downgrade of US credit. There are striking similarities.

Until about 20 years ago, for over 200 years, the US has been in a building mode. We have created the economic engine that fueled world growth, established an education system that was the envy of the world, a climate and legal structure that allowed great entrepreneurs to create companies that were the envy of the world. Even when faced with extraordinary challenges, like the great depression or the world wars, we were able to overcome these challenges.

Just as with businesses, in times of plenty, it is incumbent upon a business (or society) to put aside for the lean times. (I won’t cite Biblical references here, but they are obvious.) Since WWII, we have had numerous times of plenty. In the late 40s and early 50s, as a county we hugely increased our infrastructure (think the Interstate highways), invested heavily in universities (which have been the envy of the world and fueled much of our entrepreneurial growth), and through the concomitant consumer spending, created a surge in our standard of living. Many of these improvements allowed us to weather some of the storms that followed. With confidence, we strode into space – landing on the moon, created the Internet and countless other platforms that fuel global innovation.

But, our generation seems to have lost sight of what is really important. We have spent with reckless abandon. We have made poor strategic decisions. We, as a society and management team (the political leaders we elected) made bad strategic decisions. If we were a company, our stock would be trading at record lows and our investors would be clamoring for a change of leadership. But we have lacked the will and foresight, not to mention the systemic governance issues that prevent truly innovative leadership from coming to power. We need to make changes in the way we are run.

We are negligent for not having done this in the US. And, despite politicians’ desire for reelection demanding that they give us a silver bullet, there is no silver bullet! It took 20 years to make this problem – 20 years of lack of political will to curb spending and live within our means. But, just as I suggested with Microsoft, there are reasonable long-term solutions.

From my point of view, the solution is to unleash the entrepreneurial spirit that is embodied in the startups. This is where the economic growth, job creation, and invigoration of our society can come from. In a very specific sense, legislation before congress, like Senate Bill S256 “American Opportunity Act of 2011” (http://www.opencongress.org/bill/112-s256/text), sponsored by Senators Mark Pryor and Scott Brown that gives a 25% tax credit to angel investors; when similar legislation was enacted in other places, dramatic increases in angel investing and increased tax revenues have resulted. Another example are the proposed changes to IRS Section 1202, exemption for gains on qualified small business gains, which will give 100% exclusion of capital gains for angel investment.

These actions will spur angel investing in those high-growth startups that will ultimately move the economy. While modest in cost, they could be large in impact.

The changing nature of communication

In my lifetime, I have witnessed the transformation of communication. When my grandparents were born, electronic communication meant telegrams. A couple of generations earlier, sending a letter from new York to san Francisco required writing a letter, getting it on a ship, and having it sail around South America, taking months. In rapid succession, we deployed railroads, telephones, highways/cars, airlines, data networks, and the Internet. The result is we can now send the same information that required months in less than the blink of an eye.

But, one aspect of this communication remained the same – you needed to know who you were communicating with and their address.

In the last few years, this has all changed! We can now communicate, individually or to a group, with people who we don’t know. The rise of social networks allows people to find others that they don’t know, but with whom they share an interest – around the world! This has changed the definition of community. And the definition of “friend.”

I think it will take many years to understand all of the impacts of this profound change in communication.

At the tip of the iceberg, we see the revolts in the Arab world in North Africa, where dissenters used Facebook to organize and communicate.

I saw the precursor of this in Eastern Europe and Russia (actually the Soviet Union) in the late 1980s. When visiting frequently on business, some of my colleagues would ask me to bring blank video tapes (pre-recorded video tapes were seized on entry!). I didn’t understand this at first, until I was taken to a “secret” video exchange market, where you would bring a blank video tape and pay some money to get a current-run Western movie. It gave the populace the ability to see Western culture, values, etc. I believe it was a contributing factor in the changes that later swept that part of the world. The Internet and Facebook is a much more potent force for knowledge, freedom, and understanding.

We live in a time of sweeping change.

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