COVID-19 Webinar Part 2: the approach to triaging portfolio businesses and thoughts on the Government schemes
In the first part of our COVID-19 UKBAA Blog, 24Haymarket’s Paul Tselentis, Anthemis’ Matthew Jones and Clarendon’s Chris Trotter shared their insights and observations on how the industry has been affected so far and the ways in which their portfolio businesses have had to pivot in order to survive.
One of the biggest challenges during the COVID-19 pandemic is supporting businesses and founders. As everyone is having to adapt to the ‘new normal’ and continue as best they can, VCs are taking time to review their portfolios and assist in any way they can.
In the second part of our COVID-19 UKBAA Blog, our panellists Paul, Matthew and Chris reveal how they’ve been supporting their portfolio and they discuss the schemes brought in by the Government to help businesses.
At 24Haymarket, they’ve implemented a triage process using a two-by-two matrix to look at the liquidity runway of their portfolio businesses and the commercial threats and opportunities facing them. Paul explains:
“How we managed our portfolio depends where it falls within that two-by-two matrix. On the one hand one of our companies, an exercise machine business, has seen a surge of demand for at home exercise equipment and they have a long liquidity run. We don’t need to worry about that. It’s not even in our thoughts. Then we have other companies who are consumer facing with a short liquidity runway and for them it’s been far more drastic in terms of how we’ve weighted in with the board and the management teams to take cost out of the business.”
Runaway has been the focus for Anthemis too but they’ve been looking at each of their portfolio businesses and breaking them down into three key areas; revenue, expenses and capital raising. Revealing more about their process Matthew says:
“On the revenue side, we’re focusing where we can to optimise around business development (BD). On the expenses side, we try and help with benchmarking as well as helping to understand what actions are being taken in other parts of the portfolio in different regions, and ideas around how you might be able to deal with that. On capital raising, whether it’s our cheque book and us putting our hands in our pocket, or whether it’s knowing others that have got access to capital, that’s another way we can help our companies. That last point is particularly interesting in terms of who in the market is investing right now. Who is able to get their hands on capital, if they wanted to make an investment? That’s a way that we can help founders not waste their time, and expedite that process of getting cash in the door, if they need it.”
For Clarendon, they have been going through a similar triage process with their portfolio and they’ve discovered some surprising things. Chris comments:
“Interestingly enough, on balance for our companies, it’s been positive. We’ve had some we thought would have been in the high-risk category, but they got an unexpected order from the Cabinet Office for millions of pounds just because they had the right product at the right time. We’ve had digital health care marketplaces that have seen their busiest month ever because they’re digital and their legacy competitors just haven’t been able to scale in this market. For others in the leisure space it’s been incredibly challenging. They’ve had to furlough most of their team, and go into hibernation essentially, to wait for this situation to recover. We’ve been putting them in touch with investors who we know are active in the market right now because we don’t want to waste their time. We’ve been helping them with reducing costs as well by looking at who are the key members of staff and how they reduce some of those packages to really extend the runway, and then compensating those staff members with things like options.”
When it comes to their portfolio businesses utilising the government support schemes that have been put in place, all the panellists agreed that those schemes have been great for smaller companies and companies with large volumes of low-skilled workers, but for larger companies they aren’t as fit for purpose.
“There is a danger when you bring state-backed support into the venture ecosystem that it distorts the market because a lot of funds are still active in the market.”
Paul talked about the measures they have personally taken at 24Haymarket to enable the business to continue during these unprecedented times. He says:
“Our entire teams took a 30% salary pay cut very early on, and that filtered through the leadership teams of all of our businesses. Obviously, we’ll make it up to them when things get better. We’ve worked other parts of the P&L and cash flow statement pretty hard as well. Basically anything that is HMRC-related, we’ve looked at as a source of funding so things like PAYE and VAT. We’ve been guiding our companies to do that. In the last week or two we’ve been attacking real estate costs pretty hard. One of the outcomes of this environment is that it’s question marked to me whether a lot of start-up companies are going to need to have expensive real estate going forward as they rebuild their processes to virtual environments. I think every company in our portfolio need to attack a lot of small things to be able to stay alive.”
If the current schemes set out by the Government aren’t catering to everyone, what is the silver bullet that could make as wider impact? Convertible loan notes and co-investment could be a solution notes Chris:
“I think convertible loan notes seem like the most suitable instrument. There is a danger when you bring state-backed support into the venture ecosystem that it distorts the market because a lot of funds are still active in the market. I think pricing right now is just quite uncertain. It’s probably about how the government support is as helpful as possible without disrupting the ability for VC firms to price a deal and to avoid competing with the private sources of capital. I think some sort of co-investment model could work quite nicely so that you still have private pricing but you’re able to take advantage of more capital coming from the States.”
Paul, for the most part, agrees with Chris’ idea on the convertible loan notes but he adds one caveat:
“I think one of the challenges of EIS is that convertible loan notes aren’t EIS eligible. Obviously, advance subscriptions are but they don’t come with the protection of a loan. I think in a perfect world, if you were putting capital out right now it would be in a convertible loan instrument that would just keep the market flowing and liquidity flowing into the space. I do think there is a real risk of public capital or government capital crowding out private capital space so I think there’s a fine balance here. From what I’m seeing there is no such thing as a silver bullet really, there’s just a combination of a lot of these initiatives.”
Matthew isn’t convinced that a Government-backed fund is the answer either. He outlines his concerns by saying:
“I haven’t yet been fully convinced of the idea of a government backed fund. I’ve seen the arguments. I’ve seen the pieces in the paper. I’m not quite sure on a personal level, I can’t speak for Anthemis on this, but I’m not entirely sure that’s the right answer. From a VC perspective, at least, if you look at the amount of dry powder that is in the market right now, there is a significant amount of capital. That doesn’t necessarily help these small firms in over the next couple of months in particular. That’s a bit of an unhelpful, not entirely convinced around what’s being proposed, but I’m not necessarily coming with a fully-baked idea as to what I think can work right now. I think that just speaks to the bizarre nature of the times that we’re in honestly.”
Our series continues with Part 3 on Monday where our panellists discuss the other ways they are supporting their portfolio businesses and founders as the COVID-19 pandemic continues.