Our founder James Ker-Reid interviewed Ron Goddard, CEO of TechVentures London, a company that provides seed investment and advisory services to tech startups. They discussed funding in the current climate (COVID-19) and how we can react to what’s going on.
Over to the interview with James asking the key questions and answers:
- In the current climate what are you seeing in the seed investment market, and how responsive is the funding market to technology companies wanting investment?
That’s a good question. We are in unprecedented times with coronavirus. What is obvious to me as we start to work our way through this scenario is; we are demonstrating or exhibiting all the stages of typical fear. Anything from initial panic through to inertia and people are starting to figure out what that means to them. We are now at that point where we are starting to slowly come to terms with these issues. We are going to start to realise that things are going to go back to some sense of normality, whilst nothing will be the same ever again. But that will be absent of fear, fear will start to leave us and we will start to try go back to our normal operating model. I think companies, in particular, are like people, so those with experiences in self-mastery they are, James, going to be able to navigate. The others are going to need help with resources and managing their own emotions, and those that can manage experience with skills and emotions, one would assume that they will come out better for it.
So the funding in the markets around investments will take a view that best suits them, and I’m starting to see that balance sheets and liquidity are going to be the obvious things; cash flow is king as it always is. Funders are going to look to mitigate risks, and perhaps people are going to be circling because of a bear market, they are going to take an opportunity for lower valuations and maybe look for an opportunity to buy in cheaper. It is unprecedented and it’s a series of firsts. So in essence, now is a time for cool heads.
- What if your preferred funder pulls out of making a seed investment? What do you do then and what are some of the repercussions of for startups?
It’s going to depend on several factors: what is their current cash position in the business and does that one investor play a crucial role? So if I have a deal set up that is expecting seed investment, it could be that one investor has a disproportionate amount of capital to put into my business versus another. So if I am facing a situation, where one of those investors has a disproportionate amount I am now heavily dependent on them.
You’ve also got to look at the risk profile and the situation of your investors. For example, those that like high risk will see this as an opportunity and those that are frightened of high risk maybe a little bit more conservative.
What I will share with is the concept of “towards” and “away” a situation like this. I’ll give you an example: people are motivated to move in two ways. The first way is: “towards”. This means that there will be some investors who will be motivated to act on the upside and the gain. So the promise of a lower valuation that also means they will be gaining far more than they would have got in an ordinary scenario. They are motivated by benefit and how they are going to materially gain.
Then you’ve got what we call “away” buyers, these people are motivated by fear. You’ll see a lot of content now being distributed around the awareness of FOMO: the Fear of Missing Out. There will be investors out there who are actually motivated to act sooner than they would have done before because of the fear of missing out on something. Those founders that are able to put scarcity on the table in front of the investors, tend to do better than those that put “come and back me for the promised land” type stuff; 70% of the world’s population is motivated by an “away” message: the Fear Of Missing Out.
If your message has always been “towards”, we’re going to be the biggest, we’re going to be the best startup you’ve ever backed, we’re going to generate X amount of returns on a multiple of ‘so much’ – they are the “towards” buyers, they are the “towards” investors. And right now they are going to be thinking to themselves, I can’t see that promised land so therefore I am going to hold. Whereas you may have some “away” buyers, “away” investors, that may be thinking to themselves; where is the opportunity here. It is up to the start-up or the founder to position themselves with their messaging to be able to say, “look we’ve already got 50-60% already raised and we’ve got two weeks left and I’ve got six other people interested, I don’t think this is going to be on the table by next week”. That is a crude example of an “away” type message that drives FOMO: fear of missing out. Remember: 70% of the world’s population is motivated by an away message. If you’re leading 100% with a “towards” message, I think you’re going to struggle to get some of those investors over the line. If in doubt – always go “away”.
- How do you make that common-sense judgement, as to I’m going to invest in my product because I don’t want to lose competitive advantage, or I need to contract and be careful at this point?
I would advocate that we should behave in the ways that we always should irrespective of COVID. What I mean by that is the job is to create value that someone is willing to pay for, that is ultimately what the goal is here. If up until now at this point we have been spending all of our cash on building something without making any sales, then, unfortunately, you are going to be in a really tough spot right now.
However, if you’ve been building a product in a modulated way, for example, creating features and services in partnership for those people who need those features and those functions, most importantly, then the likelihood is you’ll find customers who value those features and those functions or the ones that they want next. You may be able to bring that product development cycle forward and it will almost pay for the privilege because of the current situation that we’re in right now.
I would say that if you’re going to build products, build products in partnerships with customers that are going to pay for them and you’re going to be making sales very quickly. If your cost basis reduces right now you need to reduce it. You need to do that as soon as you can in order to protect whatever cash reserves that you’ve got. If you build in a modular way, and you do that in conjunction with customers and or partners that are going to buy it from you, that’s one way of mitigating it. If you have a product roadmap that you know that those features are central to your customer base as well, you can expedite or bring those ones forward, you could minimise the risk there. And ultimately, by reducing your cost base below your projected revenues, hopefully that will give you enough runway to see your way through the situation that we find ourselves in.
- What are some of the mistakes that startups make by not actually involving the customers in their development of the product?
When I look to work with Founders or Co-Founders, I look for self-awareness. One of the obvious mistakes that I see time and time again, is that startups want to go and raise money very quickly, because it’s vogue and it’s the right thing to do. But we’re losing the basic competency that an investor is looking for; can you make money out of something that nobody else is making right now? So we’re looking for the demonstration of competency to be able to solve the problem to create value, and then to accelerate that with cash.
- With some funders pulling out or delaying making seed investment, what alternative options are available for tech startups to provide cash flow and seed investment into the business, in your opinion?
Well, firstly, you’ve got to deal with the problem at hand, the problem in hand may well be cash. If there are delays in that seed investment, I would definitely look at making sure my cost base is below my revenue line, that’s the immediate hole in the bucket that needs to be dealt with.
Some of the tactical things that you could do as well, rather than looking at all of the seed investment in one lump sum, you may say, actually, why don’t we broker and base the deal on stage payments or tranches with an option. So not all of the seed investment may be equity-based, some of it may be debt but also help your investor to take full advantage of the opportunity that may exist. Some investors may want to go a step further and look for personal guarantees on certain stocks, tranches or stage payments are loans that they provide. I think now is the time to ask yourself, what is the relationship like between me and my investor base? Is it one-off, I can ask these questions, but I know this information, therefore, I may be able to come up with a collaborative solution that helps us both. If not, then it may be quite bleak, and therefore, going back to the original privacy and controlling your cost base, certainly below your revenue line for the foreseeable, is the only way you’re going to really mitigate that risk if someone wants to delay or pull out.
- What do you foresee as some of the opportunities with partners, joint ventures, maybe a cross-pollination between product and service-based companies as well, and vice versa, during this time that we’ve got ahead of us?
Broadcasters are looking for content, technology partners are looking to fulfil parts to that value chain as well. So there’s a great opportunity to be able to say okay, collectively as magicians, what options can we come up with based on the scenario that we’re faced with? So if COVID is that scenario that’s impacting cash flows, or it’s impacting my ability to create content or get awareness out there, then putting those minds together, I use a phrase called interdependency, a great book by Stephen Covey’s Seven Habits of Highly Effective People, he talks about dependent people, largely being dependent on other people to get what they want; independent, I can stand on my own two feet and get what I want by myself. And you have the interdependent people that are highly independent anyway, but coming together can create far more than they ever could on their own. So I think now is the time for interdependence and collaborative mindshare, and you can come up with all sorts of solutions to the problems that we’re faced with. But that is also tethered with making sure that you don’t just run off starting fires, so to speak, on all these new initiatives and these new ideas and fundamentally miss the point of protecting your costs or somehow generating revenues to keep you solvent. So the two go hand in hand.
- What are the three practices that you could advise tech CEOs and co-founders to make in the next week/two weeks?
I refer to Jim Collins’s book Good to Great, and he talks about leadership – right now it requires two really important characteristics. The first one is to continue to have unwavering faith that you will prevail. However, make sure you’re also prepared to face the brutal facts. The brutal facts are, these are unprecedented times, so don’t let that become overwhelming and if you can’t quite figure out a way around that then surround yourself with people, an advisory team, or friends and colleagues that have a little bit more experience than you: to come together. Now is the time about prioritisation. If you’re looking for a model out there, prioritisation is a key part of competencies where dealing with issues, predominantly under stress, there’s a great model out there called Eisenhower’s model that talks about quadrant one, two, three and four activities and being able to make sure, am I working on the urgent things versus am I working on the important but not urgent things. There’s a lovely quote: ‘things that matter most must never be at the mercy of things that matter least’.
- Final question Ron, if people want to find out more about yourself or what you do, where is the best place to find out more?
You can reach out to me at my personal website which is: rongoddard.com. My seed investment website is TechVentures.london and if you just want to drop me a note on LinkedIn as well, I am more than happy to say hi. Now is the time for clear heads and don’t panic, this may be the model of the new norm that we are facing. This is a unique set of circumstances where we are going to learn some new skills – embrace it and don’t be overwhelmed.
Thanks a lot for today, Ron Goddard, CEO of TechVentures London. That is all from us at Sales for Startups today, be sure to tune in soon for more interviews with CEOs and Founders of some great companies that are shedding some light on the current issues we are facing. If you’d like to be interviewed please comment below or feel free to connect with me on LinkedIn or submit a request on our website.