“VCs seem to be hiding under their chairs,” I said. “You can get meetings, but they’re really distracted. And the last thing they seem to want to do is give you money.”
Am I talking about raising money in the aftermath of COVID-19? No. I’m talking about my own experience successfully raising money during The Great Recession. I think raising money during the mother of all economic downturns (up until this economic downturn) is instructive.
Don’t kid yourself, raising money during a massive economic downturn is hard.
In early 2008, just like in early 2020, the economic world and the venture capital world seemed fine. However, the warning signs, just like with COVID-19, were all around us:
A. January 2008.
On January 22, 2008, the Fed dropped the Federal Funds Rate, the benchmark for interest rates, to 3.5% to support the struggling housing market. One week later, the Fed dropped rates to 3.0%.
The Fed’s action didn’t help. Mortgage foreclosures kept increasing year over year. And existing home sales dropped by 23.4%.
B. February 2008.
President Bush signed a tax rebate bill allowing Freddie Mac to repurchase Jumbo Loans. Existing home sales dropped another 24%.
Yet in VC land, all seemed well. We had just started raising money, and within a month we had found our first investor, Gill.
You need to budget more time to raise your funding.
As spring 2008 turned into summer, you could feel the economic change beginning to hit the VC world.
C. March 2008.
We signed Gill’s “half-filled” term sheet at the end of March. Gill was committing to give us $5.5M. We needed to find another investor to give us the other $5.5M.
The common belief is that once you find a lead investor, then it’s pretty easy to find your second investor to close the round. In our case, due primarily to the changing economy, this proved to be really difficult.
The Fed continued taking aggressive action, just like it is taking now, to prop up the economy. The Fed announced it would lend $200 billion in Treasury notes to bail out bond dealers. That was the first of several moves the Fed took in March 2008.
The Fed also dropped the Fed funds rate to 2.25%. Freddie Mac and Fannie Mae were allowed to take on another $200B in mortgage debt. Yet the VC world still seemed not okay.
But come April, things started getting rougher.
We could still get meetings, but the tone of the meetings started changing. The enthusiasm and excitement that was there when we met with investors went away.
This was backwards what it should have been. We had a term sheet from a well respected investor on Sand Hill Road. Our team was getting stronger. Yet, we couldn’t get a nibble from anyone.
When you look at what we were fighting, it was obvious why:
D. April 2008.
The Fed lowered rates, again, to 2%. And the Fed added another $100B to their term auction facility.
E. May 2008.
The Fed auctioned another $150B of its term auction facility.
Contrast this to where we are today as I write this regarding the COVID-19. The Fed and other banks around the world have taken preventative measures to prop up the economy. Deaths from COVID-19 are around 40,000 worldwide.
So, what does this mean for you raising money against the backdrop of COVID-19? If I were in your shoes, I’d budget more time to raise money. If it normally takes 6 months to 12 months to raise money, then I’d add at least another 6 months to your planning. Assume it will take at least 12 months to 18 months to raise your funding.
I’d also assume that the world economy is going to be disrupted at least through March 2021. Even then, the economy will likely come back slowly, not like a rocket.
The easy money is gone. Your goal is getting funded.
I was having lunch with my daughter, Avery, today. I told her that the news we are likely to hear over the next few weeks is going to be bleak. I told her, based on what I have been reading, that the death toll in the US will likely be over 100,000 and worldwide the death toll will be over 1,000,000.
We are likely in for a long fight.
F. July 2008.
This is when things started accelerating in a bad way. IndyMac bank failed on July 11. Freddie Mac and Fannie Mae were on the verge of failing. They had to be nationalized to be saved.
We could still get meetings, but interest in investing in us slowed down.
The bar went up to get funded. And I would expect the bar to go up in this downturn too. You may be able to get funded, but don’t expect the great terms you might have received earlier.
The goal is to find a good VC that is aligned with you. Don’t worry so much about the valuation. It’s not likely to be what you thought it would be.
G. September and October 2008.
The shit really hit the proverbial fan when Lehman Brothers filed for bankruptcy on September 15. Interestingly enough, we had been pitching to Lehman’s VC arm during this time period.
The economy tanked. The stock markets tanked too. Sequoia issued their famous RIP Slide Presentation to their portfolio companies telling them to conserve cash.
Yet, amazingly we received a term sheet in September. Gill had worked with the investor before, but he didn’t want to work with him again. He called me to tell me the bad news.
I knew we were in for a long, cold winter.
In early October, Blossom asked me when she thought we would close our funding. I confidently told her, “I can’t see this lasting beyond January.”
It turned out I was right. After 63 investors passed on investing in us, we ended up closing our funding in January 2010! LOL.
That’s how bad things can be during a downturn.
Here’s my advice to you. Take advantage of the opportunities this downturn will give you.
For example, there is likely to be displaced talent. We took advantage of the downturn to line up top-notch engineers to join us after we closed funding.
Rents are likely to get cheaper too. We ended up getting a great space at incredible terms. Plus the landlord did a bunch of work renovating the space for free.
There are vendor deals to be had as well. We ended up signing a deal right before our funding closed with one of the leading electronic distributors in the world.
Oh, and I saved the best for last. Real entrepreneurs aren’t deterred by a Great Recession or a global pandemic, but the wannabe entrepreneurs will be gone. That means you’re likely to have less competition once you close your funding.
The point is that you can’t sit around feeling sorry for yourself. You can’t control the situation, but you can control how you and your team react to the situation. Plenty of great companies have been funded in downturns, maybe your company will be next.
For a great analysis of what Israeli VCs are doing read, Yuval Ariav‘s excellent analysis here: VC in the Time of Corona.
For more, read: The 11 Steps You Need To Take To Deal With Coronavirus