Preparing For The Best and Worst Cases In The Current Environment

MAR 21, 2020 - Mark Macleod

COVID-19 Update

Last week I shared some thoughts on what was happening in the capital markets as a result of COVID-19 and what companies should be doing to come out the other end strongly. Since then, things have gotten worse. Most of us are now working from home. Cities are going on some form of voluntary or mandated lockdown. Stock markets are massively down and we have officially entered into a recession.

Here at SurePath, most of our deals that were not already in the closing / exclusivity phase have hit pause. We speak with strategic buyers and institutional investors daily. Almost universally, they have stopped working on new deals while they wait for the bottom and figure out what their new reality is.

Many of our CEOs and their boards have been reaching out and asking for our view on what is happening, I have been using my new-found spare time to read, listen and think. I’d like to share those thoughts with you. It’s important to act now to both manage potential downside and prepare for the potential upside when things turn around, which they most certainly will. And potentially sooner than people think.

 

What Is Happening?

I’d like to focus what is happening from an economic perspective. First, unlike the 2008-09 recession, nothing systemic caused this downturn. Other than manufacturing being impacted by slowdowns in Chinese supply chains and the total decimation of the travel industry, nothing happened in the economy to cause this. The downturn that is now happening is being intentionally implemented by governments looking to stem the spread of the disease. This is important because it suggests that the recovery, when it comes, will be swift.

What we are seeing is panic (perception is reality, so this is as real as anything else). Panic is spreading far faster and wider than any flu. A big question in my mind is how long will it take for consumers to have the confidence to spend once things return to normal.

In addition, the highs and lows of the stock markets are being enhanced by algorithmic trading, with significant trading volume being based on volatility rather than the fundamental merits of a stock. I would also argue that public tech markets were overvalued and in need of a correction anyway. That has definitely happened.

The big unknown here is the duration and severity of the forced shut down of the economy. Our clients serve SMB customers. The longer those SMBs are essentially closed for business, the more we will see outright business failures. This is a big potential risk for all our clients. The people losing work at the moment are customers of these small businesses. The economic impact of this could last for some time.

 

The State of the Capital Markets

Just as nothing systemic has happened to our economy (yet), the same is true in terms of availability of capital in both the VC/PE and strategic buyer markets. There is a lot of dry powder sitting on the sidelines, waiting for things to calm down.

Some Stats:

Venture Capital:

  • 266 VC funds raised $47B in capital in 2019
  • 63 VC funds raised $16.5B so far this year (~ double 2019 pace YTD)

Private Equity:

  • 214 PE funds raised $275B in capital in 2019
  • 40 funds raised $43B in capital so far this year (more or less on pace with 2019 YTD)
  • There is ~ $ 2 Trillion in dry powder overall in the PE segment

Debt:

  • While commercial lenders may get more strict in the short term, private debt funds are sitting on record levels of capital ($241B of dry powder)

Strategic buyers:

  • The companies in the SurePath SMB index are sitting on $15.5B in collective cash
  • Collectively, those companies made 36 acquisitions in 2019

 

Now Is The Time To Prepare

Whether your company is in a position of strength or not, now is the time to prepare for i.) a downturn of unknown duration and intensity; and ii.) an inevitable, strong rebound in appetite from both investors and strategic buyers.
 
On the downturn, this is war time! Recommended measures:

  • Build in daily early warning indicators for revenue acquisition and retention. Create a war room task force to focus on these measures
  • Ruthlessly review spend, trimming anything that is not clearly adding value
  • If you are pursuing a venture-backed, “burn your way to greatness” momentum play, consider whether you can dial back top line growth, lower burn and extend runway
  • If you are bootstrapped or PE-backed, focus on maximizing EBITDA
  • Draw down available credit lines to bolster cash reserves

 

No Crystal Ball

I won’t predict when things will turn around. But when they do, there will be a mad rush of companies looking for capital and buyers and vice versa. The earlier you prepare for that so you can be front of the line the better. Notwithstanding the amount of dry powder in the system, the bar is going to be raised on new deals. This means more preparation, better materials, better performance, etc.

I know this is a challenging time. If you would like to talk through the current situation and discuss what specifically you should be doing and when to best position yourself for the rebound, let’s chat.

Mark Macleod
Written By:
Mark Macleod is the Founder of SurePath Capital Partners. Sitting on both sides of the table, Mark has helped raise hundreds of millions of dollars and successfully led companies to acquisitions by Airbnb, Blackberry, Gannett, Rackable Systems, Return Path, Thrivehive and more.

About SurePath Capital

Based in Toronto and San Francisco, SurePath Capital Partners is the only investment bank focused exclusively on the global SMB software market. We work with sellers in this market to ensure they are funded for growth and positioned for meaningful exits. In addition, we work with buyers in this market to help shape their strategy and execute acquisitions.

Follow us on LinkedIn and Twitter for regular updates on deals and trends and in the SMB software market. Say hello: info@surepathcapital.com

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