Hope is not a Strategy
By Jim Tholen, Managing Partner
At True North, we’ve been having conversations with investors, colleagues, trusted advisors, and clients about the state of raising capital and M&A during the pandemic.
We may at some level be contrarians but are concerned that our health and economic crises are not reflected in the surprisingly robust funding and M&A environment in which we find ourselves.
Our mantra is “hope is not a strategy.” To this point, we recommend that companies plan for, and address the probability that, COVID is our new normal and not assume it is going away anytime soon.
We fully recognize that despite a very uncertain economic (and public health) outlook, the good news is that really good companies are getting funded and M&A deals are getting done.
What are the implications to us? Simply, if you are in a position to fund (and the good news is right now markets are robust) — raise capital! If you are not, realistically plan for a tough rest of 2020 going into 2021.
Back in March, it wasn’t so clear that even really good companies were going to be able to get funded. And even if there were interest and opportunity, how would companies be able to pitch venture capital (VC) or private equity (PE) firms? How would investors dig into the opportunity and perform due diligence? And with the economic turmoil, what valuation could companies provide to potential financiers?
We certainly didn’t envision that public markets might actually be considered “frothy” today. Yet, Initial Public Offerings (IPOs), in general, are seeing lots of activity. In fact, a certain kind of blank check company IPO, called a Special Purpose Acquisition Corp (SPAC), has been particularly active. Anecdotally, we’re seeing a rebound M&A activity as well. IPO’s, and even robust private investment trends and valuations are ultimately being driven by the underlying strength in the public stock markets. We concur with a common view that underlying these equity valuations is the unprecedented liquidity being provided by the Fed.
How long can this Fed driven asset bubble last? Hard to tell, but we believe long term valuation and markets follow economic fundamentals, and those fundamentals are very concerning to us. So if you can lock in capital, be aggressive. If that option is unlikely, hunker down and get through these crises.
In that spirit, we offer some observations:
- Really Good Outcomes for Really Good Companies
Growing companies with strong business models and established growth prospects are mainly doing fine when it comes to fundraising. There was undoubtedly a COVID-driven delay in several financing processes, but once these companies reset their business operations and 2020 financial view, deals are getting done. This is particularly true for companies that were already in a process to raise equity. For these businesses, our recommendation is to get aggressive, get funded, and think about sacrificing a bit of valuation to lock in 18+ months of capital.
- Hot Segments for Funding
Specific business segments and verticals are particularly attractive in today’s environment. Examples include cloud-native companies (primarily B2B vertical or horizontal applications), the defense technology space, and communications and collaboration offerings. As you think about how to drive your company strategically, and perhaps raise capital, are there aspects of your company that lend themselves to strong vertical market plays? Software as a Service business models?
- Timing and Valuations
We still hear deals may take a little longer to get done than pre-pandemic times. Interestingly, though, we have not seen a big discount on valuations — something many experts in the financial community expected would occur due to COVID-19. At True North, we theorize that public market valuations broadly drive the lack of discount. So again we suggest locking in financing now even if you take a more relaxed view of valuation.
- Hope is not a strategy
For companies facing uncertainty due to COVID-19, not showing sustainable, growing business models, or other issues, getting funding can be very difficult. We have seen, and been told by investors, that organizations are still willing to invest in growth, but only if those companies are consistently growing, have a pretty good bead on COVID impacts on their business and are at or near breakeven cash wise. We frequently hear the sentiment “I’ll fund growth but I am not here to fund losses.”
As we mentioned in an earlier blog (CFO’s in the Time of COVID), if funding is difficult, we recommend getting very aggressive on refocusing the business on the bare survival essentials to ride out 2020. It’s also essential that your business figures out how to accelerate cash flow. For example, can you offer a select set of your biggest customers an aggressive deal driven by an upfront pre-pay? Can you get creative on terms to accelerate your traction in the marketplace. Offer long term pricing but without forcing a longer term commitment, perhaps? It’s initiatives like these we’ve seen companies deploy to get creative during the pandemic.
We are long term believers in the magic of creating value through technology and entrepreneurs. But we worry the entrepreneurial optimistic side of our personalities are causing more hope than strategy. Plan for the long haul . Stay safe, work hard, and, as always, let us know if we can help.
