How one venture capitalist thinks about the pandemic

1/ A thread on how one venture capitalist thinks about the pandemic from a fund standpoint.

2/ First of all stating the obvious -- this is first and foremost a global scale humanitarian crisis right now. It's staring us in the face but from (most of ) VC Twitter you wouldn't know it.

3/ My job is to manage a fund. As such my first take is to form a view on the depth of the crisis. The difficulty is that no one can model this thing. Any forecast we make is more likely to reflect our own appetite for risk and view of the future than anything else.

4/ Analysts are paid to produce numbers, and so numbers they will produce, but we do not believe that any macroeconomic model can cope with the current situation, in the same way that the 2008 crisis broke the "dream machine" of risk models that underpinned credit derivatives.

5/ Neither do we trust the numbers coming out of China, or think that any of the South Asia countries are out of the woods yet. We will see. There is too much we don't know. The best hope lies with science, and notably, cheap at-home testing.

6/ We do however have to advise our startups on what to do, so we need to form a somewhat informed view of the future, and a decision framework. As Howard Marks recently told Harry on his podcast, investors cannot let themselves be impacted by emotion.

7/ What we can reasonably assume is that it will deeper and longer than 2008, probably harsher than 2000-2003 and probably, hopefully, nowhere near as bad the Great Depression. Government response, agile manufacturing and health / biotech mobilization should ensure that.

8/ Because travel and trade froze at the same time, and given that the whole world is gradually moving into lockdown, the global economy is experiencing a combined supply and demand shock which is unprecedented.

9/ Working capital gets hit first and hard, with household wages and consumption following in lockstep. Credit follows naturally.

10/ Governments have played the Quantitative Easing game non-stop over the last few years. Rates are so low that even the Fed has nowhere to go, and it is unclear what rate cuts would achieve anyway.

11/ The US is also hampered by deep partisan politics which render both federal government and states less effective in their stimulus response. All this does not bode well.

12/ On the other hand comparisons to the Great Recession seem excessive — governments have long understood how to use Keynesian methods in recession, and the massive stimulus packages are witness to that.

13/ We are anticipating a deep dive that will last 12 months or more, followed by a tough period of stagnation before a return to growth. As I said, these are planning assumptions not forecasts, and they will be overrun by facts week after week. Hope this tweet ages badly.

14/ In the face of such uncertainty -- VCs will look at existing portfolios first and look at (a) crisis impact company by company (b) financing risk on the existing portfolio (c) valuation risks.

15/ At @stride_vc we are relatively "lucky" in that (a) we invest at seed so burns are usually low and valuations are reasonable (b) almost all our companies are funded into 2022 (c) we are only about 30% invested and early in our investment history

16/ The companies most at risk are those who have recently starting investing into growth and are into that weird "Series B gap" where you start tooling up for scale and are heavily reliant on hitting growth forecasts. A tough place to be right now given the uncertainty.

17/ Per company assessment yields a surprising picture - a majority of our companies are not currently seeing a major impact and a few are accelerating. I don't know how long this lasts. The point is that the data does not tell you what you'd necessarily expect right now.

18/ The immediate adjustment tends to be hiring freeze and a hard reassessment of cash flow forecasts assuming deep cuts in growth and a significant uptick in churn. Anything else and you're probably deluding yourself or not being prudent. That is the only way to forecast runway.

19/ We tell all our management teams that forecasts do no matter anymore -- the only things that matter are (1) taking care of your team (2) making a calm and dispassionate assessment of the impact on your business (3) taking a few but well reasoned decisions right away and...

20/ ... deciding very exactly what to measure and what leading indicators you are going to monitor obsessively to determine where your market is going. This is completely company specific, and it is important to avoid confirmation bias on positive news.

21/ Right now I am SURPRISED at how functional our companies' clients are in the face of this pandemic - decisions get made, deals get closed. Large corporations have not frozen in the face of this crisis - they are moving, and fast. Long may that last.

22/ From an investment standpoint - we here hit the pause button on NEW investments for a bit -- I am not smart enough to process this information and have confidence in our decisions on new investments, and our focus is 100% on assisting our founders with hands-on advice and cash where appropriate.

23/ Whether we hit pause for 2 weeks or 2 months I don't know yet. We invest money on behalf of other people and right now we do not feel confident putting cash to work. I read voraciously and try to understand as much as I can, and I haven't gotten my head around this yet.

24/ What is absolutely clear in my mind is that you can expect deal volumes to plummet this quarter. It makes for good marketing to say that you are open for business, and I like the positivity, but we need to see how much $￡ actually gets put to work.

25/ Uncertainty kills decision making. VCs are in the business of taking risk AND managing risk. Right now you can take it, but in most cases it's really hard to manage it.

26/ I am confident that deals will continue to get done. Given how adaptable startups are they will find ways to to work through. Key is making sure founders and teams are coping OK and figuring out how to manage culture and team engagement in distributed environments with all this anxiety flowing around, sick team members etc.