CFO Guidance Can Help Your Portfolio Companies Navigate the Perilous COVID-19 Journey
Venture Capitalists and Board members now have the fiduciary obligation to their Founders to either become Sacagawea themself or find someone who can.
Two hundred years ago, explorers Meriwether Lewis and William Clark famously embarked on an expedition to map the North American continent west of the Mississippi and find a path to the Pacific. It was a great unknown. Navigating the startup ecosystem often feels like the great unknown too. CFO Guidance makes for a better journey.
Lewis and Clark’s epic journey took them through foreign territory that was both dangerous and often life-threatening. Amazingly, only one crew member perished during their two-year quest.
In 1925, British explorer Percy Harrison Fawcett, an experienced cartographer and veteran of several expeditions, set off in the Amazon jungle in search of the mythical Lost City of Z. Fawcett and his team were never seen again.
Fawcett was far more experienced than Lewis and Clark; his survival skills were legendary. Yet the British explorer perished. So what did Lewis and Clark have that Fawcett did not?
Lewis and Clark’s advantage was a Native American named Sacagawea, an indigenous guide who was highly skilled, experienced with rough terrain and unpredictable conditions, and fluent in multiple dialects. Sacagawea understood the threats that were facing Lewis and Clark and, most importantly, how to navigate that threat to find opportunity. She was able to speak native languages to trade for horses, and she knew about secret mountain passageways that saved time and avoided hostile tribes. Sacagawea allowed the expedition to not only survive but to thrive.
The COVID-19 crisis has thrust both investors and their portfolio Founders into a similar real-world journey fraught with scary, unknown circumstances, and potential danger at every turn. Founders are experiencing revenue famine, hostile customers and prospects, disengaged employees, headcount reduction, and a multitude of other business problems they’ve never before encountered or perhaps even anticipated. If their company is to survive, Founders need a Sacagawea to lead them.
CFO Guidance Helps Startups Navigate the Unknown
Many startups we talk to have various contingency plans that include two years of runway and three scenarios. Those scenarios are tied to specific triggers - loss of customers, unemployment rates, and churn. As a guide to your Founders, it’s imperative you review and poke as many holes in their scenario plan as possible to ensure the safety of their journey over the next two years. It will require further analysis and reporting to know their portco is headed in the right direction. Plans written six months or a year ago need to be immediately revised. And then reviewed again at least quarterly until the path is clear.
Two years of runway can disappear much more quickly than you think, especially in uncertain times. Runway is defined by burn rate, revenue, and cash in the bank. Burn rate may go up unexpectedly:
- Founders may need new tools or processes to accommodate the changing customer persona, which will need to be re-evaluated entirely when in recovery.
- Marketing budgets/CAC may go up due to online competition rising due to no in-person meetings. We’ve already noticed a pricing increase in online ads.
- Sales KPIs will change, and sales incentives will be impacted.
- Upfront guaranteed payment options with inventory purchasing may increase (increased down payments).
- Layoffs often cost more money than you think - severance, vacation accrual, possible lawsuits.
What once was considered a predictable revenue model may be impacted:
- Enterprise clients are already shifting from net-30 payment terms to a net-120, severely impacting startups' cash collection. Watch for terms being upped.
- A higher percentage than usual will ask for discounts or payment deferrals or will end in delinquency.
- Many companies will shift to a lower subscription tier or cut their subscriber seats to those who are necessary, reducing MRR.
- Churn rate will be much higher than expected; there are no precedent benchmarks.
- Revenue leaks will become more and more noticeable and expensive to clean up, adding to the burn.
A New Startup Paradigm
The new paradigm of success for both Founders and established companies alike is to try and stay flat. The psychology for the founder is going to have to shift to a survival mindset to make it through the projected two-year runway.
After reviewing several contingency plans the past few weeks, a trend is emerging and, frankly, is somewhat troubling: Founders wear rose-colored glasses, and many simply can’t see the raging fires in front of them, including an increasing burn rate!
There is a way, however, that allows your Founders to come out of the next two years with everything they need to scale in a growth environment. They simply need the right guide -- a Sacagawea-- who knows the languages of finance, operations, sales, and marketing so they can keep an eagle eye on LTV, CAC, and churn, while allowing founders to do what they do best - build and launch innovative new products that solve problems allowing their company to scale and be successful.
Having the right CFO in these times is crucial. Have their teams been, there done that? Who can mentor them through these times? Sacagawea had been kidnapped in her youth by several tribes and therefore understood how to communicate with them. This gave her the advantage of negotiating. In modern times, it’s a deep network and cross-functional/industry skills that provide value.
CFO Guidance is Integral
As an investor, you might think that your portco’s VCs and the board can easily play the role of Sacagawea.
However, an excellent guide becomes an integral part of a team. They provide not only their skills and tools to navigate the group to safety but also their insight. Insight and knowledge are what sets a Sacagawea apart, and being involved in the day to day is critical.
At Burkland, we recognize this, and it’s our philosophy to match our forward-thinking CFO’s with startups carefully. We work closely with our clients to pair their startup with the right Sacagawea - the CFO who has the industry experience and knowledge to provide the best financial insight possible. The CFO who can integrate easily with the startup’s team and help management with the daily decisions they face. Burkland startups navigating this current crisis know they can trust and depend on their Burkland CFO to guide them, just as Lewis and Clark trusted Sacagawea to lead them to the Pacific Northwest.
Burkland offers expert CFO services, accounting services, and tax services to startups across the United States. Reach out to us to learn more about how we can help your startup or portfolio company navigate the COVID-19 health crisis and downturn.