Investor Roundtable: Raising Capital Amidst COVID-19 – Investors Perspective

(filmed June 4, 2020)
Consero’s Private Equity Roundtables enable Investors & Portfolio CEO’s/CFO’s the opportunity to gain valuable understanding and share actionable information for the middle-market tech and PE community.

Panel:

The conversation was led by Natalie Townsend, VP of Sales for Consero. Consero is a Finance as a Service provider whose portfolio of clients include over 130 sponsor-backed software and services businesses that range from $10M to $200M. Natalie shares trends, tactics and observations that we are seeing in the small to mid-market space during this economic disruption.

Holly Maloney – Managing Director of General Catalyst
Holly invests in and partners with disruptive, growth-stage software driven businesses. General Catalyst is a venture capital firm that makes early-stage and transformational investments. General Catalyst backs exceptional entrepreneurs who are building innovative technology companies and market leading businesses, including Airbnb, BigCommerce, ClassPass, Datalogix, Datto, Demandware, Gusto (fka ZenPayroll), HubSpot, KAYAK, Snap and Stripe.

Tyler Newton – Partner, Catalyst Investors

Tyler Newton is a growth private equity and growth stage venture capital investor. Tyler is a Partner at Catalyst Investors, a leading growth equity firm focused on investing in high-growth, middle market private companies in technology-enabled services sectors. He currently focuses on investments in the software, food tech and business services sectors.

Thomas Kershisnik – Managing Director, Five Elms Capital

Thomas Kershisnik is a Vice President at Five Elms Capital, a leading growth equity firm that invests in fast-growing, SaaS and internet-enabled businesses. Five Elms partners with growing, founder-owned software and services businesses, providing capital and resources to accelerate growth and further cement their role as industry leaders.

Tanner Cerand – VP of Investment Research, Build Group

BuildGroup is an operator-led investment company that provides permanent capital to entrepreneurs building the next generation of technology businesses. Prior to joining BuildGroup, Tanner was responsible for building and leading research & business development strategies at Vista Equity Partners. Before Vista, I worked at Gerson Lehrman Group (GLG), UBS Investment Bank, and Ferris, Baker Watts, Inc.

Condensed Notes from Panel Discussion:

Raising Capital Amidst Covid-19: What is the current obstacle course for Private Equity? 

• There is still money in the market and ready to be deployed to help brands grow. The biggest change lies in not the money itself, but the appetite for uncertainty.

The changing outlook on valuations:

• The outbreak has turned every investor into an impact investor as they deal with the unfolding human and economic fallout of this market disrupter. A combined humanitarian and financial catastrophe requires a business approach that looks beyond the bottom line.

How are PE/VC firms evaluating market in Covid 19:

• Need for understanding the impact of portfolio companies as they touch every corner of the economy
• Map critical stakeholders and develop a communication plan for each stakeholder group to maintain trust and reputation. Focus on cascading quality communications to portfolio companies
• Business that are exclusively focused on travel, teleconference, finance and enterprise security – basically all ends of the exposure spectrum
• Net new investing activity that are certainly on those which may work significantly like healthcare, telehealth, remote work, enterprise security and other digital consumer service model that have excelled dramatically
• Focus is on area which is well known, and not getting to know new investors/enterprise
• Investments are active as innovation and business cycle don’t stop
• It’s the understanding on how pipeline conversions are taking place for the next two quarters what is the cash collection going to look like, need to make sure the businesses are well capitalized
• Great businesses are still raising money in this environment
• Activities on both Investor side and investing side are pretty strong

How to make investments more virtual

• No more an option for meeting publicly for conference or flying. People are trying to maximize the Zoom option.
• The combination on so much dry powder available more than ever with public equity market
• A big reset in valuation is expected. Big companies are still getting well-funded and healthy valuation.
• Need to work to make those connection in this virtual world

How is the remote conference working to make transaction virtual

•  Depends on the nature of the conference if the conference is one of the industrial balances where larger companies are trying to develop new customers relationship or to know the thematical understanding of the business rather than knowing them individual level
• Companies have put good resources to meet more people, big companies spend time with people and they want to see how its going to work virtually
• The companies have their own agenda that they set to get productive
• Investment banking conference which is typically set up to meet companies back to back through out the day is quite productive because here it is focused discussion without any distraction
• Bank conference where we have on one on one are more efficient
• Concentration of capital is seen and businesses spend lot of time to know who got funded this week
• The more usage of tools is required to create this special experience in long lasting trans

How is the Portfolio company progressing working remote?

• Business have seen success. PE portfolio companies are being efficient. Product and Development teams’ productivity is higher
• Establish a common crisis response structure for portfolio companies — one with clear responsibilities and direct accountability
• Taking reviews and taking foot prints helps, it’s a big eye opener
• Update scenario plans and agree on actions to cover a 3-6 month impact and a 12-18 month impact, as well as a process to update these plans weekly
• Need to bring team together, analysis is on what it is going to happen from a year now if people are continuing to work from home
• What do you to about the counter aspects and that busy culture at the office but it is still working fine
• Need to recreate the environment for the young and new recruits as everything is starting virtually for them and need to induce them to culture of organization
• How you maintain culture, build rapport and inclusion that in the virtual world

How is the Traditional Enterprise Sales Module going to get digitalized?

• Explore the new option, know the new platforms, more usage of Software and tools that allow collaboration and able to crisply articulate the value of proposition of what is sometime a complex sale remotely – especially inside the enterprise security
• Building a strong social media presence is essential for digital sales
• We often find companies that have excellent operational discipline but fail to apply a similar rigor to sales
• Improving the odds, unifying the digital experience, connecting the digital supply

How is the Management getting to know the executives?

• Establish structured daily check-ins
• Provide several different communication technology options
• Everyone knows that this is less than an ideal scenario which demands more time commitment
• Upfront of the understanding having more frequent dialogues, having more connection points on one to one basis across the whole executive team and more frequency of connection is what expected and welcomed
• It is not the management getting to know the team/executives it is time where team getting to know the management. More direct interaction is complemented.
• Need to be creative with respect to references and sort of engagement scores of the company and study the NPS of the culture of the businesses
• Dynamics of the team and the scale ability of the company helps
• Early stage partners say that this is the better time than ever to understand the people
• This is really humanizing element like how world is getting to know each other now. More casual discussion needs to be encouraged.

Advice to the companies who want to raise funds now:

• It’s good idea to start early in building relationship. Less travel is involved. People will have more time to have that 30min to 60min Zoom call before necessarily hit the capital.
• High velocity outbound calls to potential portfolio investments are welcomed. Volumes with respect to travel have gone down from 40% to 30% but the quality of conference calls which is an internal measure of the quality of business have gone up.
• Quality calls are divided into two groups one is the companies that are planning to raise capital other one who are trying to explore their options and just trying to know more investors.
• More than 50 thousand dollars is spent for these market studies and to know any basic facility available that can help
• Deals are getting closed without having met people personally, it is time ad value on how to meet people effectively via Zoom
• The biggest component that is missing is the ability to enter the company and to sense the company’s culture, energy and style. You can absorb a great amount just sitting in the lobby of the office. How to sort through executive dynamics, collaboration and working style is something needs to be figured out.

If any funds fell through during COVID what is the need of reevaluating it now?

• Those long list of committed but not yet closed investments during COVID. Days’ worth meeting when COVID hit to understand that fundamental long-term structural shift in whatever these businesses is specifically dealing with.
• Reassessing helps to keep the promise in terms of funding

What could be done differently if the situation was known two months prior?

• Conserving cash flow in business. Using capital wisely to grow the business and stay on it.
• Gathering good resources in team can change the things to to the good.
• In such downtime companies think of staying stiff on the position rather than getting large share in the market
• Scenario planning in each company is must. Practical conservative plans need to be put in place to know its effect. Analyze the structure, capital efficient growth would last.
• Sales has been trimmer here and there, a plan on how many sales person is required can help

How are you using your Brand/Voice to speak up about the standing?

• We do have a recognition and platform and extensive reach to portfolio companies so it is not only our direct voice it is also about our extended support to empower the voice of the companies we have invested
• We insist companies to make a statement of standing of solidarity and support and acknowledgment of everything which is going right now
• We have been operating for little while but not systematically, we have to try to do better. It’s almost like dancing on the thorns, it’s not what you did yesterday and tomorrow. It is all about day in and day out what you do for the next part of the year to make the world a better place.
• In industry network is huge part of success that everyone enjoys. Be it a investor side or Enterprise side.
• Help someone excel. They may not have the same connections or networks of the ecosystem that you do. How can you make connections for the folks that could be potential life changing and can make changes to the industry over long term.
• What we do as investors is build strong relationship through investments
• CEO’s completely shift in their business model because of COVID and get back on the right track and are seeing the successful of those efforts

What kind of companies are PE/VC targeting?

• From short term thematic perspective view we made some short-term sprints that we worked on to both potential value-oriented investments and momentum investments.
• Certain industries that we have deep roots like for really long period of time, for example travel industries
• For us it is to think how we envision that world of travel is going to change, what are the new business models and experiences
• From the B to B software perspective we are tying to understand the friction of the market cycle
• How do we make sure we invest in the short term, behind the great business that have amazing natural expansion within our customer base
• It may be more challenging to acquire net new customer; how do you make sure you have backing platform so that they can expand in relatively low friction environment
• Ability of the business to survive from good time to bad is something that more investors are keeping eye on
• We believe best business model win, this concept of modern business model around. If SaaS is leading a world just, SaaS is not enough anymore.
• In those places where it has got effected, digital players are the one who are getting share. SMB’s are trying to come up back faster