This is a copy of a letter we sent to our portfolio founders on April 1 2020.
We wanted to share some follow up thoughts to the note that we sent each of you in early March. It was only three weeks ago, but it feels like a lifetime ago. We hope all of you, your teams and families are staying safe in this difficult time. There is no better reminder of our shared humanity than a globally synchronised pandemic reaching all corners of the world.
It is hard to imagine a more tragic set of circumstances; the loss of human life, the financial devastation for so many families and businesses, and so many aspects of our day to day lifestyle suddenly disappearing.
We are inspired by the incredible resilience and leadership we have seen from so many people in our communities from front line medical staff to people helping others in need in their communities.
We have been blown away by the leadership you have all shown in guiding your businesses through the early stages of this crisis.
You have all been agile, resilient, decisive, empathetic and calm. Great leaders really distinguish themselves during a crisis, and we are proud of you and your teams.
We encourage you to share your learnings with each other on our slack group and to reach out to each other, as well as to us if you need any help. We have real clarity on our job over the next few months, which is to work with you and support you to the best of our ability.
It is too early to have a clear view on the full implications of the crisis, but the possibility of a breakdown of healthcare systems in many parts of the world and a very severe economic downturn are tragically very real risks. To be clear, we are not making predictions about how the next few months will pan out, but simply observing that societal and economic implications that seemed remote possibilities at the start of the year are now very material risks.
All countries outside China had several weeks to prepare for the crisis, but only a few countries such as South Korea and Singapore fully mobilised themselves to mitigate the risks. We are now seeing a low number of new daily cases emerge from China and the economy bounce back very quickly. This is potentially a positive sign for what we may experience in the rest of the world, but it is incredibly difficult to make predictions; the bounce back in China may reflect their much greater capability to manage through a pandemic, and we are yet to discover if a second wave will emerge in China. In other words...
The level of uncertainty is incredibly high.
What does that mean for our businesses?
Our advice is that today is a time for caution, even a dose of paranoia, and tomorrow will be a time for boldness.
The great Andy Grove coined the phrase "Only the paranoid will survive." The emotions of fear and paranoia are not typically helpful when you are trying to build a successful startup. Among the most important attributes we look for in founders are optimism, self-confidence and the ability to articulate a vision of the future. You all possess these attributes (and many others) in great abundance. Grove wasn't suggesting that paranoia should be the default mindset in great business leaders. He was arguing though that in the life of every business, there will come a time when you face a major crisis. All of us are now experiencing that crisis in the lives of our companies and your mindset will need to reflect that environment.
Although the crisis is external and completely outside our control, how we all respond to the crisis is within our control. In the immediate term, we think that decision making should be based more on worst-case scenarios rather than more optimistic forecasts. Given the rate at which the situation is evolving, we encourage you to regularly update these scenarios. Our guess is what will look like a worst-case scenario today may not look like a worst-case scenario next week.
What does this mean in terms of decision making?
Firstly, each of you are dealing with a different factual situation. Your cash balances and runways are all different to each other, the short and long-term impacts of the crisis on your business will vary, and the severity of the crisis will vary by industry and geography. There is no one size fits all approach. As we mentioned in our earlier note...
Cash is king.
We can't emphasise that enough. Many of you have strong cash balances or are feeling minimal short-term impacts, but in all cases we believe it makes sense to be laser-focused on your cash position. For example, it is unlikely to be sensible to be spending a lot of money on acquiring customers today when those prospective customers are focused on much more basic and existential issues right now. (A few of you are operating in markets where the crisis is driving changed behaviours in the short term that benefit your business and, in those cases, a big emphasis on customer acquisition may be the logical thing to do.)
Most of you are in the fortunate position that you will not need to raise money in 2020. For those of you who are raising in 2021, markets will likely be in worse shape next year than they are now. If history is a guide, capital raising levels will reach their low point at least a year after the start of the crisis. If there is a need to raise next year, be open to opportunistically raising this year, but also look at ways to extend your current runway into late 2021 or 2022.
Similarly, adding new recurrent costs to your business (such as new hires) might be risky given the lack of visibility over the next few months. We urge you to be cautious in the immediate term and identify innovative ways to reduce expenditure, ideally, in a way that minimises the impact on your teams. The current environment is also an important opportunity to test your core assumptions. Markets have been rewarding growth at all costs for the last few years but going forward markets will only reward profitable growth. It is a good time to ensure that your unit economics are sustainable, including on your most marginal customer. A baker doesn't sell a loaf of bread for $3 that costs her $4 to produce, and neither should you.
Only the paranoid will survive, but only the bold will thrive.
If today is about being cautious, then tomorrow will be about being bold and laying the foundations for the next ten years of growth in your business. It is hard to know when "tomorrow" might be, but we all should be getting ready for it. The mantra should be that you will emerge from the crisis in a much stronger position than going in. There is a lot to be worried about as we look at what is immediately in front of us but a lot to be excited about in the longer term.
My experiences at SEEK during the Dotcom crash of 2000 impacted my thinking and the lessons are still fresh in my mind. The period from 2000-2003 was both a tough period of managing through a crisis but also a major period of value creation. We entered the Dotcom crash as the market leader, albeit in a highly competitive market and with a large cash burn. We emerged from the Dotcom crash as a profitable business and with a dominant market leadership position. Ironically SEEK had the same share price in 2003 as we had in 2000 despite the progress we had made. However, in reality, we had created substantial long term value during this period, and our share price increased more than 20x from 2003-2007. This was a defining period in the life of our company.
As we move into a new phase, we are likely to see the most expansionary set of economic policies since the end of World War Two and a record level of new business formation. We will also see changed patterns of behaviour by consumers and businesses. These changed behaviours will be an acceleration of the key trends that were the catalysts for you starting your businesses in the first place; the migration to the cloud, core business operations moving from spreadsheets and pen and paper to robust SaaS products, more tele-health, more online education, expansion of the gig economy, more people looking for homes online, more people financing those homes via online applications and more efficient and scalable financial processes. These tailwinds, combined with coherent strategies and outstanding execution, are the forces that are driving significant value creation in your businesses.
A part of the reason for cash preservation today is that it will provide you with enormous optionality as we move into the recovery phase. We have seen many great companies emerge and thrive during past crises. Those companies that survive the current storm will be incredibly well-placed to thrive over the ensuing years. You will have less competition, a more rational environment and changes in customer behaviour that will have become embedded.
Only the paranoid survive a crisis, but only the bold will thrive as we start to emerge from this challenging period.
Thanks for your incredible dedication and leadership. Like you we are worried about today but excited about tomorrow.
The Square Peg Team