Focus On The End Goal

Coronavirus is a wrench in the forecasts of most companies.

In order to not only thrive, but actually come out of this pandemic on top, seed-stage companies must quickly understand and execute on the right course of action, or rather, reaction.

Here is a three-step process for reacting to the pandemic I use with some of our seed stage portfolio companies.

Step 1 - How is the pandemic impacting the business?

For the most part, companies fall into one of three scenarios:

Scenario A - Coronavirus is a tailwind accelerating a market shift in the company’s favor. Think video conferencing, home fitness, food delivery, etc.

Scenario B - Coronavirus is creating some headwinds for the business. Issues may include longer sales cycles, more no shows, or lower conversions. These are businesses that will no longer hit their plans, but can still fight to achieve some level of growth.

Scenario C - Coronavirus has halted activity in the business’ market to nearly zero. Think travel, retail, events, etc.

Step 2 - Recognize sustained revenue growth as the goal.

I want to emphasize two key realities for most seed stage companies that cannot be overstated enough:

  1. They’re burning money. And that’s not changing any time soon.

  2. They have limited runway. So they need to show significant progress to secure the next fundraise.

Success is tied to unlocking more capital, which for seed stage companies means raising a Series A.

Based on conversations with my colleagues at Series A funds, the emphasis on sustained revenue growth is more pronounced than it was before Coronavirus. Other facets (health of revenue growth, retention, TAM, NPS, defensibility, team, etc.) are still important. But a lack of sustained revenue growth seems simply to be a non-starter for most Series A firms.

Sustained revenue growth of ~200% or more year-over-year. That is the goal post.

Just as valuable as recognizing what is success is recognizing what is not.

Unlike many later-stage or public companies that are modeling out scenarios that lead to profitability or slower growth, these may not be viable options for seed stage companies. Later stage companies either have large balance sheets that let them continue to burn money despite slowing growth, or are already profitable. Seed-stage companies need to either focus on sustained revenue growth, or minimizing burn and operating at breakeven to hibernate through the impact of the pandemic.

Step 3 - Scenario B may be the most challenging.

For companies in Scenario A, lean into the tailwind and capitalize on the opportunity. Fortunately, these companies should have an easier time demonstrating sustained revenue growth.

For companies in Scenario C, the answer is simple. Get to breakeven and hibernate until customers have reopened their minds to purchasing new products. Until then, it’s probably not worth burning money. As a result, when the market demand does return, the company is well positioned and resourced to go to market as planned.

The greatest challenge is for companies in Scenario B.

This is where both the majority of companies are, and where the greatest uncertainty exists. It’s the scenario in which entrepreneurs must observe their market closely and try to gauge what type of growth is possible. Many teams will be tempted to try to push through the lull in demand, and stick to their plan. But this may come at the cost of lost runway and unimpressive growth. Burning $800k to achieve 50% year-over-year growth may not be a worthwhile investment.

In these weeks after what seemed like the peak of the panic, it is important to collect data and determine - for those companies in Scenario B - whether they can pivot and find a path into Scenario A (and the sustained growth requisite for success), or whether it makes more sense to make the difficult decision of aggressively cutting back on burn and accepting Scenario C. For many seed-stage companies, staying in Scenario B and fighting an uphill battle that will undoubtedly leak finite resources may not prove to be the right long term decision.

The next several weeks provide a valuable opportunity for seed stage teams to take account of which scenario they are in, and accordingly, the cost-benefit analysis of when it makes the most sense to push on the gas to achieve growth - whether today, in two months, or in one year.