Research

The global environment is suddenly brutal for tech companies with COVID-19 sweeping through country after country, oil falling from $54 a barrel to $30 per barrel and the Dow falling 2,000 points.

But instead of panicking, companies should consider taking practical steps now in operations, financing and M&A in order to generate multiple options for a company to come out ahead.

Operations

• Review and generate a realistic assessment of the runway;
• Focus on core products and cut new and risky initiatives;
• Analyze current burn rate and make adjustments to costs, including cutting personnel, if necessary, to run leaner; and
• Accelerate AR and pay AP as late as possible to increase cash reserves.

Financing

• Assess the strength of the financial commitment of current shareholders regarding participating in next round, or a bridge round, if necessary;
• Approach new VC’s or other financing sources earlier than usual, since the next round will be more challenging as financing sources will be more focused on the survival of their current portfolio companies rather than new investment opportunities;
• Expect raising the next round to be more difficult, take much longer and require more intensive due diligence;
• Adjust valuation expectations since having a successful round at a lower valuation is preferable to holding out for a higher valuation and risking dissolution;
• Focus on generating profitability as early as possible since this will increasingly be an investor requirement; and
• Develop a highly realistic, defensible path to profitability with detailed assumptions for investors.

M&A Process

• Consider a parallel path of raising the next round and starting the M&A process simultaneously;
• Expect more sellers in the M&A market, many of them desperate, as a company’s competitors run out of runway;
• Expect less active buyers as large corporations become more conservative and focus on maintaining their own cash reserves;
• Budget more time for the M&A process since it will take longer to find the right buyer and for more intensive due diligence;
• Be creative with the development of the potential buyer list and include international buyers and buyers in adjacent sectors; and
• Act now if M&A is a viable option, since the longer a company waits, the more desperate sellers will be in the M&A market and the more conservative buyers will become.

Conclusion

The goal is to take practical steps in operations to survive as long as possible in a harsh market environment and simultaneously generate multiple options by initiating the fundraising and M&A process early and potentially in a parallel path.

Hoping the market will recover without taking any action will not benefit companies. Companies need to take practical steps now to generate multiple options.