Cowboy VC’s Aileen Lee: Your coronavirus scenario planning should be more conservative

The tech industry (and the world at large) is not experiencing temporary anxiety — the uncertainty we’re all coping with is the new normal.

Sudden shifts in behavior have made some startups targeting slow-moving, old-school industries more relevant than they could have imagined, such as those in telehealth, distance learning and remote work. Most, however are seeing massive decreases in revenue, forcing them to cut costs and even lay off teams to slash burn rates. Other startups simply won’t be here in three to six months.

Cowboy Ventures founder and managing partner Aileen Lee, who coined the term “unicorn,” says tech companies going through scenario planning need to begin thinking long-term.

“We’ve spent the last month scenario planning with our portfolio companies, and in most cases, we’ll have conversations about what these scenarios can include,” said Lee. “And when we look at the planning around those scenarios, they often don’t feel conservative enough. Most entrepreneurs are optimists, and we are, too! But it seems safer to have more conservative plans [and start expecting] that this is going to impact us for longer and be worse than we expected.”

Lee and Cowboy Ventures partner Ted Wang joined TechCrunch on Tuesday for our first episode of Extra Crunch Live, a virtual speaker series for Extra Crunch members. In a live Q&A that included questions from myself and the Extra Crunch audience, Wang and Lee covered a wide range of topics, including PPP loans, advice for business leaders around layoffs, the right time to seek funding and the right firms from which to seek that funding, how to pitch during a downturn and which sectors in particular Cowboy is interested in financing right now.

You can check out the best insights from the call, or catch up on the full conversation via the YouTube embed below.

We have several outstanding guests, including Charles Hudson, Mitch and Freada Kapor, Mark Cuban, Roelof Botha, Hunter Walk and Kirsten Green, joining us on Extra Crunch Live over the next few weeks. Sign up for Extra Crunch to get access to all of them.

Aileen Lee on coronavirus scenario planning

One question we often ask is, “have you lived through a recession before, or worked through a recession before? What’s your baseline of how you’re thinking about how this is going to go?” Every company is in a different position, depending on what they do, where they are on their product-market fit journey, or on their go-to-market journey, who their customers are and how their customers are affected, and then also how much cash they have in the bank, and what the burn rate looks like.

So, the thing that we’ve spent the past month doing with pretty much every portfolio company is scenario planning. And when we look at the planning around those scenarios, they often don’t feel conservative enough. Most entrepreneurs are optimists, and we are, too! But it seems safer to have more conservative plans [and start expecting] that this is going to impact us for longer and be worse than we expected.

Ted Wang on PPP loans

We’ve been advising people to really look seriously about need and about the intent of those loans. To make sure that if you’re going to apply for them that you’re going to be fulfilling what the goal is, which is to keep people employed. That’s been our advice on that larger picture. You have to realize that this time in our lives is a challenge that many people haven’t experienced before. And I think it’s changed the risk/reward. Running a startup is always a very risky activity, but in this moment, capital is so dear. It’s just so hard to get. And not just investment capital, but capital from your customers. All of a sudden, you have to think a little bit differently about each dollar and how precious it really is. So that’s the meta-advice we’ve been giving our founders. If it’s between being too aggressive and too conservative, here’s a place where you’re going to want to dial back and take a look towards being a little bit more conservative as it relates to spend.

Aileen Lee on layoffs

If the founders don’t communicate somewhat transparently and honestly about the cold, hard facts, and if they don’t make changes from “business as usual” from six months ago, I think team members will be like, “wait, this is not going to end well.” We need to make adjustments. The world is going to be different. Our sales cycles is going to be pushed out and customers are going to ask for discounts. Cash collections are going to be harder. [Employees will realize,] we pay all [of our workers] a lot of money. We’re not going to make it.

I think that will make people even more stressed, in some cases, unless leaders really communicate how they think about it and are willing to make changes. There’s just no chance for a company without that, unless you are a very specific kind of business that will thrive in this climate. I think it’s going to be hard to not make changes.

My fear, and I know I’m not alone on this, is that, we’re just in the beginning of this downturn and a lot of corporations and bigger employers haven’t really done their layoffs yet. I don’t think we really know how much longer this is going to go and how much worse it’s going to get. That might cause startups to actually have to do a second wave later on.

Ted Wang on the right time to seek funding

When the crisis hit, [investors] had to scramble the jets. We had to do two different things. Number one was that we had to figure out how to work in all these ridiculous places. How to set up our work from home and manage our communication. How do we do team meetings? How do we do all that stuff?

The second thing was we had to do all the scenario planning with our portfolio companies. That became super urgent. We spent a few days on PPP — should we do that, should we not? — and how we advise companies on that. Then, how do we do the layoffs? So we spent a few days on that. I’ll just speak for Cowboy.

We went through and did scenario planning with every one of our material portfolio companies. We’ve been on calls with all of them and looked at their plans and helped them tweak them and all that type of work. That just took up a lot of our time versus looking at investments. We never said, “oh, gee, we’re not interested.” But, I don’t think we pursued things as diligently as we would have in the past. Now, I feel like a lot of that’s cleared up.

There has been an ongoing debate over whether VCs are really open for business. It’s kind of an interesting one. VCs said a week ago that they’re not open for business and then today are saying “Yeah, I’m more open for business than I was.” So, I think we needed about a month to digest a bunch of things. But I also think it’s different for seed-stage funds and for multi-stage funds.

Aileen Lee on which VC funds to look to right now

Two weeks ago, 90% of my time was working with portfolio companies. This week, it will probably be 50%. Our first priority is still to the folks we’ve already made a commitment to, and that always takes precedence. But as the next month goes on, we’ll have more time and energy to focus on taking new meetings and our process will be different.

We’re going to have to experiment with how we get to know people over Zoom because it’s just different when you meet someone face to face. There’s a physical aspect, there’s a dialogue and a chemistry and [doing that over Zoom] is not as efficient. Actually, in our team meeting today we’re going to talk a little bit about virtual ice-breakers.

It’ll be good in the sense that, regardless of where you are in the country, it’s going to be easier to raise money from an institutional fund than it was before. But I think the multi-stage firms that, say, have an early-stage fund and a growth fund, they’re in a different zone. Oftentimes, they have many portfolio companies that have really high burn rates and they have a lot of money, so they’ve got a different level of triage going on with those portfolio companies. Also, in some cases, because the market’s been so hot for the past 10 years, they’ve had a shopping list of companies that they wish they had been able to invest in, and maybe those companies may take an extra $50 million or $100 million dollars right now. So, a lot of the multi-stage firms are going to focus on getting a little more money into Stripe or Airbnb or the companies that they wish they had exposure to.

So, if you’re looking for seed (and I know it sounds a little self-serving, but), I would focus on talking with seed-stage funds because that’s what they’re dedicated to. If you’re raising a Series A or beyond, you should maybe talk with the folks you’re engaging with at a multi-stage fund around understanding what’s going on in their lives, in their portfolio, about their process, because they have a lot of different things going on in terms of how they’re going to spend their time. At least, that’s my understanding.

Aileen Lee on how to pitch VCs during the downturn

Founders should be clear on how much they want to raise, how long they want it to last and what they believe they’ll be able to get done during this time. From everything we’ve heard, enterprise buyers are on lockdown right now. They’re not buying new software or trying out new stuff. We don’t know how long that is going to last. Will it be three quarters? Four? Longer? How are you going to get pilots done? Are you depending on what you’ve been doing or do you have a new plan? Depending on what you do, it may be easier or harder to get new customers to try and use your product.

Founders, if you were raising a month or two months ago, it’s really important to go back and almost start from scratch with your pitch. You should rethink how you tell your story and why you’re raising now and what you plan on getting done.

In enterprise software, in particular, there are tons of blogs and resources with historical data around other enterprise and SaaS companies for the past 10 years. No one knows what the best-in-class SaaS metrics will look like 12 months or 18 months from now. Are they flat? Are they up 20%?

You have to be more open-minded and less wedded to benchmarks in the past and really think about, based on what you do and the market you’re going after, what is ambitious but realistic to accomplish in the next couple months?

Aileen Lee on what she’s looking for in future investments

We’re looking at stuff that goes after the aging population, aging in place and isolation. We had been really interested in that. We’re also looking at things that help women, in particular, with healthcare. I think that those things, especially if they have a telemedicine component, will still be exciting. We’re investors in a company called Drop and they have a consumer e-commerce business, and they have a lot of stuff for audiophiles and people who work from home, so they’re doing really well. I think there are things that will still do well in D2C. We’re investors in Natalist, which does a lot of fertility products and pregnancy tests and they’re actually flying off the shelf. So people are using their isolation at home in very constructive ways.

Ted Wang on what he’s looking for in future investments

I’m known as Mr. Unsexy at Cowboy, and it’s a title that I feel very proud of. But what that means is that I love investing in back-office tech. I have a company that does accounting software, a company that does sales tax calculation and one that does warehouse automation. I love all that stuff that other folks don’t see working. To me, it’s really beautiful and amazing. Luckily, I think honestly privacy and logistics are really going to be booming. There are things that will be hit harder, particularly those that service the restaurant industry. There’s a wonderful company called Toast, and I saw where they had to do some big layoffs. I saw ClassPass, which is a unified gym membership. It’s a wonderful company with great leadership, and read the super heartfelt blog post about how they had to lay off all these people. It seems horrible.

If you are providing services that back our consumption and experience economy, it’s just going to be very, very difficult. So I can’t imagine that that’d be something we’d be super-excited to see in the near term.

There is an interesting piece here. I looked at a travel company recently that provides software for hotels. And I actually think this might be the right time for them because, if you can get the folks on the phone, you may be able to get them to switch systems right now. Because it’s hard to fly the plane and build the plane at the same time. Now’s the time where, if there aren’t many passengers, maybe you can swap out a couple of seats, so to speak.

It’s all very, very fact-dependent. Even things that are counterintuitive can actually be right in this moment, but you really have to have thought it through. And that’s the question we’re going to ask every entrepreneur. Essentially like, “I’m assuming that you came up with this plan in the pre-COVID era, so what’s changed and what are you thinking about that’s going to be really core to how people solve problems right now?”

You can check out the entire hour-long discussion in the YouTube video below: