Rethink: Raising Capital in the Midst of a Global Crisis

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Discussion with Apostolos Apostolakis, Niko Bonatsos, Nick Kalliagkopoulos Panos Papadopoulos, Yannis Tsakiris and Marco Veremis

Continuing its webinar series, which aim to shed light on various facets of the coronavirus emergency, Endeavor Greece invited Niko Bonatsos, Managing Director at General Catalyst, Nick Kalliagkopoulos, Principal at Prime Ventures and Yannis Tsakiris, Deputy Minister for Research and Technology, to discuss how global VCs are reacting to the crisis and define key factors that entrepreneurs should consider as they readjust their fundraising plans, alongside local VC representatives Apostolos Apostolakis, Partner & Co-founder of Venture Friends, Panos Papadopoulos, Partner at Marathon Venture Capital and Marco Veremis, Endeavor Greece Board Member & Executive Chairman of Upstream. The discussion was moderated by Panagiotis Karampinis, Managing Director of Endeavor Greece.

A Crisis is a Terrible Thing to Waste

Panagiotis Karampinis opened the panel discussion by pointing out how different this year is shaping up to be, compared to our original expectations. “Some of Endeavor’s companies were planning to start fundraising when the crisis happened, so we thought it would be useful to put them in touch with the experts, Greeks who are investing all over the world, to find out how this crisis is unraveling. We also asked Mr. Tsakiris to join our discussion to share the government’s perspective on how things will change going forward.”

Niko Bonatsos was the first to share his views on recent developments and how the companies in General Catalyst’s portfolio were managing this unprecedented, fluid situation. “This is not an experience or crisis you can model on previous crises, so we are seeing our founders manage it on a week-by-week basis. Every week that goes by brings new information, which they take into account to make their decisions. The advice we have given time and again is that cash is king. If they need to make changes, now is the time. Today is a better day to cut costs than tomorrow.” He also spoke of the potential inherent in this crisis. “We are working very closely to identify new opportunities that may come up. After all, a crisis is a terrible thing to waste.”

“The advice we have given time and again is that cash is king. If they need to make changes, now is the time. Today is a better day to cut costs than tomorrow.” Niko Bonatsos

“This is a very unique situation for everyone”, remarked Nick Kalliagkopoulos. “We have all been bracing for a financial crisis, but at the moment, what we are facing is a health crisis, the likes of which we have not experienced before. Companies that are dependent on face-to-face interactions are very much affected by it. We are on the more pessimistic side; we don’t expect the coronavirus to go away soon. We expect this to be a longer recession, with a V-shaped recovery. For companies that are being severely affected by this crisis, we urge CEOs to go into survival mode and change their mindset. We advise them to take measures as early as possible, with a view to preserving cash to secure more runway.” During the past few years, capital was easy, but things have notably changed on the fundraising side. “Companies that were signing a minute ago are faced with investors who might pull out or terms that are getting harsher.”

Apostolos Apostolakis shared a more optimistic view of the situation facing startups in particular, noting that they are uniquely positioned to handle this crisis. “There are two disruptions we need to take into account. The first is the immediate effect of the lockdown and the second is the effect of a recession that may last for a year or longer. Startups are better at adapting to crises. After the initial demand shock, they can handle a recession and even thrive in a recessionary environment. We saw that in Greece during the crisis.” In terms of advice, he spoke of this being a good opportunity for a “sanity check” within teams. “You get to find out who you can count on. There is a culture of alignment, a sense of urgency and purpose in tough times. Great companies will be built in these times.”

Panos Papadopoulos expects a longer recession ahead, but on the positive side, the acceleration we are experiencing in terms of digital activity and digitization is likely to be beneficial. “There are more opportunities for startups and the low-cost environment in Greece means that our companies have more runway; this will be a comparative advantage. Greek companies have had to operate in an environment of more cash efficiency, but this will be a wake-up call to be more efficient on all sides of the business. There are a lot of opportunities for startups, not so much in innovation, but in terms of cutting budget and delivering a better service or product at a lower cost.”

“There is this nice line I read somewhere, that we went from a time of unicorns to a time of camels”, joked Marco Veremis. “After the longest bull market in history, what is necessary now is an ethos of cash management and attention to detail that had been largely absent before. That’s a good thing. There will always be crises down the road, so what we’re telling our portfolio companies is to change the way they look at cash and runway, but also assess how much people are contributing to the team. Greek companies, assuming a healthy runway, can take advantage of this crisis. After all, a crisis is not only a time for carnage, it is also a time of opportunity. Big companies are big ships that cannot easily change course; the small ships can navigate such an environment a lot better. You can travel light and fast to achieve great things over the next year. If you want a shot against the Goliaths of your sector, this is your time. However, beware that this sense of urgency will not be around for long. The big guys are already regrouping, and they will eventually shift course as well. This opportunity will not be around forever.”

Economy in Hibernation Mode

Deputy Minister for Research and Technology Yannis Tsakiris remarked that this is the first time an external shock is affecting the global economy in such a way in our generation. “And yet, the shock will be short. At a certain point things will go back to normal. But when we wake up again, things will be completely different.” He spoke of the digitization efforts underway in Greece and of the progress made already, both on the government side and in terms of the way companies are conducting their business, noting that these changes would have taken much longer to materialize under normal circumstances.

“You get to find out who you can count on. There is a culture of alignment, a sense of urgency and purpose in tough times. Great companies will be built in these times.” Apostolos Apostolakis

In terms of the timing of this severe and unpredictable crisis, on the heels of another prolonged crisis in Greece, he observed that all sectors have been affected, much like in other countries. “We really don’t know what the outcome will be in terms of the overall market conditions. Our intention was to keep companies and markets in a type of hibernation mode, so that when normality comes back, those companies may resume their operations. Of course, given that Greece was coming out of a 10-year crisis, resources are not abundant, so we have to do more with less. We are trying to exhaust the leverage factor in financial instruments and introduce products that entrepeneurs can benefit from throughout this hibernation period.”

With respect to EquiFund, Mr. Tsakiris mentioned that the government was considering different ways of supporting this particular market. “Some ideas are already on the table and discussions with stakeholders are under way.” That being said, the Deputy Minister also stressed how important it is to treat this threat as an opportunity. “Startups that have the backing of a fund manager or a solid investor are in a position to burn some cash and take advantage of this opportunity to shift into a more profitable way of doing business, moving towards another sector or another revenue model. On the other hand, some fund investors might default. We hope this won’t happen, but we are looking for ways to address this potential issue as well, while of course being limited in terms of state aid restrictions. We are trying hard to find our way around these to support this ecosystem, in alignment with the EU tools that are becoming available. We are also looking into more sector or stage-specific measures, but these will need time to mature.”

A Helping Hand

Asked about what VC funds are doing to help companies and founders, Mr. Bonatsos stressed that it is a hard time for founders and investors alike. “We have not had to take into account the economic environment in such a way before. At the same time, many companies didn’t have a work from home culture in place, so that’s another shock. We try to be good listeners, good partners and good problem-solvers. We try to be a bit more pessimistic than founders and CEOs. Times are different now so we need to make sure they have enough runway to rally the troops and get us to the holy land.” In terms of discussions taking place in board rooms, he underlined that burn reduction is almost universally seen as key. “We are helping companies take the steps that will buy them time. Beyond that, we are taking care of our people. At General Catalyst we have an incredible roster of venture capitalists who share their insights through webinars in which all of our portfolio companies can participate.”

Mr. Kalliagkopoulos agreed that this is a difficult period for founders. “Suddenly the whole world is collapsing due to something completely outside of their control. Some are lucky to have a lot of cash, while others were close to a new funding round and need to make very tough choices. We try to be there for our founders, not always successfully. There is a fine line, which VCs sometimes pass and end up showing less empathy than they should. But we need to be on the pessimistic side. We need to be the people challenging the founders’ assumptions, asking what happens if things go even worse, reviewing every cost line, analyzing the ROI of every euro spent today versus 6 months from now.”

“We are spending a lot of time with founders who want to spend time with us”, Mr. Veremis pointed out, explaining that some founders seek help, but others are perfectly capable of taking care of their own. He also spoke of his personal experience in two companies that were on different sides of the spectrum, in terms of capitalization, in times of crisis. “Persado was super-well capitalized and Upstream faced death 4-5 times in its life, so I have a view on what it looks like to have 30 million in the bank and to have mortgaged your own house to save your company. There will be an element of natural selection. The kind of entrepreneurs that can operate in this mentality are commandos, skilled at adverse warfare, who, under these uncertain conditions, are in a position to capture more territory than normal soldiers.”

“You can travel light and fast to achieve great things over the next year. If you want a shot against the Goliaths of your sector, this is your time.” Marco Veremis

“What we are trying to do is mentor founders on how to operate in this environment”, he added. “There is a psychological component to this. You need to prepare for battle and sacrifice, take pain and lose people. The second thing we’re doing is helping them get acustomed to very detailed cash managemet. There are certain skills that come with these guerilla warfare conditions. Think of the person who chases those who owe a business money. That is someone who is very vital right now, who was not as important before. The third thing is we’ re trying to extend money where it is necessary and where we think there is a real opportunity. Finally, we are helping founders socialize with each other and other founders that are older, have failed before or created businesses under duress. These kinds of old-timers are very valuable right now.”

Fundraising Action

“Founders right now are heroes”, remarked Mr. Papadopoulos. “We are changing the allocation of our reserves, but we are still going to invest. What will change is that alongside product innovation, companies need to be able to manage their go-to-market path. You need to be able to master product-led growth. Land new clients with a hook or a small contract and keep them in. There is no clear path to staying alive, so this is a time for founders to think about their go-to-market strategy and have a path to revenue.”

“We’re spending much of our time supporting founders”, said Mr. Apostolakis. “At the same time, we have capital allocated for new investments and we want to do another 4-5 investments in the next 9 months that will all be founder-driven, as we are an early stage investor. If there is an amazing founder who is solving a clear problem in a big market with scalability, we will look at his business. We’re not here to monitor, we’re here to be helpful and to share our insights and knowhow from similar situations in the past. Fundraising is the most difficult thing to do right now, so we can support our portfolio companies by investing or by helping them reach other investors. Investors have a tendency to be risk averse in thinking that this situation will last forever. Our job is to be there and fight hard for our guys.”

In terms of fundraising action, even though there might not be so much movement in the VC space, Mr. Veremis expects a lot of action in debt (private debt and refinancing from equity), even in smaller amounts than were previously possible. “I would advise founders to keep their eyes open for such opportunities. Activity will pick up, albeit money will be there through different instruments and under stricter conditions.”

The fact that General Catalyst is so well capitalized, having recently secured $2.3 billion in capital commitments, makes it especially well positioned to take advantage of these conditions and make the right investments to create wealth, according to Mr. Bonatsos. “We are in a good position to ride this wave. In terms of Series A, not much has changed in terms of our investment base. We are loooking for companies with some evidence of a product/market fit. In terms of more mature businesses, we are also looking for high quality opportunities that were previously valued in the stratosphere. Marquee assets that are now getting priced at the right valuation. We are also actively exploring investments across 5 themes: travel, F&B, healthcare, media and the future of work.”

Concluding the webinar. Mr. Karampinis asked Mr. Tsakiris how the planning regarding certain government initiatives that had been underway and would have been helpful to local entrepreneurs has changed. “Unfortunately, the crisis came at the roll-out moment for the Hellenic Development Bank. We had also announced an equity instrument on energy and we were also designing an accelerator program. We have pushed these initiatives back a few months, but our planning hasn’t changed. Of course, we might redesign some products, depending on the market needs in the aftermath of the crisis. Overall, I would say that soon enough, it will be a great time for fundraising. Liquidity has not disappeared in the market; it is simply not circulating. Sooner or later it will resume circulating, in a market with new conditions, new players and new priorities.”