Susan Mason CoFounder/Partner Aligned Partners on Covid-19 crisis for startups

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PEMO: Welcome Susan. So good to speak to you. One of the bonuses that have come out of this crisis is an incredible increase in value of our human connections. I’m sure. And I do appreciate you. I was wondering if you could tell me a little bit about what you like to invest in.

SUSAN: Sure. at Align Partners, we invest in enterprise focused startups. We don’t invest in seed. We do invest in early stage, but our companies typically have initial revenue traction to validate customer adoption. And our companies tend to be capital efficient, meaning that they’ll use less than 15 million in total equity to achieve profitability and, and exit. Some of our companies have used as little as two and a half million total and there’s abuse the full 15. So it ranges between there. We are not focused on any particular vertical markets. So we are more agnostic with regard to vertical markets. That would include, FinTech is a oftentimes favorite for us, but we also have marketing IT, healthcare it, legal IT. So we have a number of different segments that we have had very successful companies grow and expand within.

PEMO: Fabulous. And so how are you managing your current portfolio with the crisis?

SUSAN: Well, in February when we had some visibility into what was happening in China and then the jump to Europe, we immediately pushed our companies into plan B operating plans to preserve capital. So they cut their burn rate pretty quickly. They streamlined, there were salary cuts. They renegotiated leases with their landlords. They got they basically removed any of the ancillary items that were nice to have but not must haves for the company’s survival. And that made all the difference in the world because they reacted very fast. They also reached out to their customers to let their customers know that they were in fine shape. They had plenty of capital. They were actually funded. Most of our companies are funded to profitability and that they would be there with the customers in the longterm. And that’s important because I think in a downturn like this, there are a lot of companies, startups in particular that will fail and the customers are going to be hit hard because they took a risk on that startup.

SUSAN: And so it’s really important that startups let their customers know that they’re going to be there for the long haul. Then the second element of course is your employees and making sure your employees are care of and, and ensuring not only their health, but that psychologically that they’re ready for the work from home. That ultimately happened. Most of our companies were quite fine shifting to work from home. In fact, what we’ve discovered is that credit activity is, is high and the employees were, are very much enjoying it because they don’t have hat, you know, 45 minutes to an hour commute each way. So so they’re actually, it’s ending up working out better. And we have a number of leases coming up for renewals at a a group of our companies. And they’re actually debating whether to get office space again or to just try to work from home for a year and see how it goes.

SUSAN): And if it does well then they’ll continue. So interesting changes underway and in kind of the capital market. And our companies responded well, so all of our companies will make it through this downturn. They have at least 18 months runway or cash to profitability. We did have them on the on the revenue plan anticipate that second quarter we asked them to do a kind of what we would call a worst case analysis, which was assumed second quarter had zero revenues. Third quarter you saw 25% of your plan of what you had thought you were going to do in 2020. And then your fourth quarter is maybe about 45% and figure out how to make the cash last at least 18 months or to profitability under a dramatically reduced revenue plan. And that has worked out well. It’s given them flexibility for, you know, some customers that are under duress have asked for, do you, we don’t want to pay a year upfront cause we’re trying to preserve cash. We want to pay quarterly. And that gives our startups the flexibility to say, yeah, we can do that. We’ll work with you. Because those customers will remember the startups that worked with them.

PEMO: Yeah. Well you’re such a forward thinker Susan who always amazes me because I have to say, I’m going to put my hand up this like totally took me by surprise and I was madly trying to put a a panel together in San Francisco and got it to the point where it was just going to be the panel and we were going to live stream at CapGemini and then everything happened. And and then a shelter in place came into effect in March. And it was all over.

SUSAN: Well, it was much more dramatic than I had ever anticipated because I really thought, well, you know, consumers would lose confidence in spending because of the illness. Therefore the economy was going to go down. Never in my wildest dreams did I think we would be under a what going weak lockup.

PEMO: Okay. But still still what you did with your portfolio companies that was amazing. And so, so ahead of the game I would say. And so hopefully their customers and them will survive much better. Are you still looking at other investments or are we managing that?

SUSAN: Yes, we are. We are active. So there are, there’s two groups. I would put the potential investments in, two groups. One are those investments, those companies that we have been considering before. And these might’ve been earlier stage than we would normally go in and we’ve just kept touch with them. And so we are retouching them to say, how are things going? Have you progressed to the point where we’re interested because we’ll have met with those entrepreneurs and those teams previously. And so we have a good feel for the company and the opportunity. So that’s one kind of bucket of investment opportunities that we’re looking at pretty seriously. And then the second bucket of opportunities are those entrepreneurs that we’ve not met except over video conferencing. And and so that’s going to take longer because it is difficult for us to do an investment without actually meeting the team and, and doing some white boarding and, and just being in the room with the team to see the unspoken dynamics. And so that will be hard for us if, if this con, I mean, let’s hope, you know, knock on wood here, that we’re not going to be in this lockdown for much longer. We’ll start to meet selectively with folks. But you know, we won’t be very active in that. And so those companies will have to really rise above our hurdle to get our attention to make us want to do that. But that’s not to say that we wouldn’t,

PEMO: Yeah, no problems. And on an overall sort of general level, how, how do you see the next couple of years? I mean, I know it’s very hard to predict for any of us because on many levels, this is all taken us all by surprise. But what are your thoughts? What are you, you’ve obviously are a person that prepares ahead of time, which is great. So how do you think it’s gonna look like in the next 12 months, next 24 months?

SUSAN: So for the startups I think there’s a plus and minus the plus is for those startups that can come through this downturn and prove that they are of significant value to their customer base because that’s the only reason customers are going to spend money on their products or services. Those companies will be very valuable. The companies that had a vitamin a or had had a, you know, a, a, a, a style or a or a trend, but not a need, those companies will be very challenged. And so I think for those startups that can prove their significant value to the customer base, that will make them valuable and they will be sought after for both investment as well as M. And a or so that, so that would be the positive side. And the other positives are, you know, salaries are going down.

SUSAN: The competition is decreasing in the Valley. So you’ll be able to hire really high quality talent at very reasonable prices. If you have a company that is one of those highly valued companies by customers, you are a safe Haven for employees, so you will, you will get first dibs on high quality employees. I think leases and subleases are definitely becoming available because startups are getting shut down left and right. And in fact Marty Pitchin son who lovingly is described as the undertaker of Silicon Valley he goes in and shuts down companies essentially is he told me that before this happened kind of in the January, February time frame, he was probably shutting down maybe four companies a week. He’s doing now between five and six companies a day. So that is a lot of fallout and those leases will become available as subleases.

SUSAN: Or those landlords are going to be looking for new renters and much better pricing. I think the fact that work from home is working for a number of companies is going to put more pressure and will reduce leases even more. So there are cost advantages that startups are going to see. I think the negatives are, you know, that the bubbly momentum times of easy money is gone for now. We have our cycles, right? We have our cycles and and so you’re really going to have to prove your wealth and your worth and your metal. Really prove why should your startup exist in this environment.

PEMO: So really what I’m hearing is that it’s very grounding this whole experience because things did get a little bit inflated and a bit out of control here in the Valley.

SUSAN: Yes.

PEMO: Yeah. And now from what you’re saying, I’m thinking, well that’s all good, really good stuff and brings us back down to earth and makes the companies more real. And as you said, providing real value. So

SUSAN: I think so. I mean that would be my take on it. I know there’s a lot of pain. I am empathetic with the pain, but I think ultimately it makes us stronger as entrepreneurs and investors.

PEMO: Yes. And so on that point, which is obviously brings me to my to be point, I, I really am interested in the whole human factor here because this isn’t just a business finance crisis like we’ve had in years gone past. We’re also far isolation and I’m wondering what your take is on this of how that’s going to affect our, you know, us working in the startup ecosystem here in Silicon Valley. And you know, for me, obviously it’s, it’s created a very high value on and significant value on my my connections with others. And made me more aware of that. But that’s always been a strong point for me. So I’m just wondering how you think, how you see this could affect us all generally.

SUSAN: Pemo, you do an excellent job of being on that forefront of things and really bringing people together, so I applaud you for doing that broadly and having such an excellent group of connections and your access. So you’ve done a great job. So yes, I talked to my CEO’s a lot more. I probably talked to them at least a couple of times a week, each one just to check in. Because when it, when we first had this kind of tidal wave come over us you know, you have to reach out and say, Hey, I know you’re scared. I know you’re scared for your company, for your employees, for your customers. And so let’s just talk it through. And make sure that we understand the proactive things we’re going to do to survive and then thrive. So that was that proactive reach out by us, by my partner, and I was very important and it set the stage, I think for them to be open and honest.

SUSAN: The other aspect is to coach them on how to help their employees through this. Employees are feeling isolated, they’re feeling vulnerable. They don’t have their cohorts with them, particularly if they’re the younger, you know, stuck at home alone. That can be pretty isolating. So having team conferences not just once a day, but multiple times a day just to check in, making sure that people are responsible for each other. Just as the, you know, the, the company’s family. You know, check in, have lunches together, schedule once a week. Everybody’s on the video with lunch and chit chatting, not talking about work. So I think those are things that can be done to help. Now the go back to work aspect cause we do have particularly the younger employees want to go someplace and be with others and and so our companies that made it completely voluntary as to when they feel comfortable doing that they are going to alternate days so that they can enforce the, the distancing aspect and, and have masks.

SUSAN: And then and then other employees that don’t want to do that, you know, as long as their productivity doesn’t decline or is it severely impacted, then, you know, our attitude is they should work from home as long as they want. I think that flexibility is important. And I think you’re seeing that in the ecosystem in general is people are being very flexible. The question is when we reopened you know, will we have those? Well, we’re certainly not going to have large gatherings until probably next year. And so you will see more small groups, which in many ways I think small groups together are more willing to share their vulnerabilities and advice across each other. And so I envision that this is an opportunity for, you know, the, the small breakfast group to get together the, the small coffee group to get together as opposed to these, you know, 200 person conferences. Unless you’re going to do that over video,

PEMO: Deeper engagement then. Yeah,

SUSAN: I think so. I would because there is a community for that and you know, I, you on the Vanguard here would be the perfect example to lead us off.

PEMO: Definitely. We’ll do little litmus test. So what do you think the new normal scatter look like? Ah, I know it’s really hard to predict, but everyone’s got different opinion about whether things will ultimately go back to the way they were or or whether they there will be a new normal and we’ll have to adjust to that.

SUSAN: Hmm. So, yeah, my crystal ball is not working today, but I can, I guess I can speak well for my, from my personal view is I will reduce travel until I feel very comfortable with the close engagement. I think the latest pictures coming on the cheek to jowl, kind of crowding on airplanes and you know so so that’s certainly one effect for me. I companies their customers actually are not necessarily going to want them coming to see them. So I think you will have to be very creative about how you establish rapport and relationship with your customers because the, the, you know, the closer contact, let’s, we’ll, we’ll come in and do a strategy meeting with you or something. I’m not sure customers are going to be comfortable with outsiders coming in for awhile. And and so that’s gonna put a lot of onus on how do you establish and, and build a relationship of trust with your customers. So that’s something that we’ve been working on as well. So yeah, many challenges and no shortage of challenges, but that’s why we have creative people to help us.

PEMO: Well, and still and Silicon Valley. I mean, that’s what we should be all about. So I guess it’s just, again, another litmus test to see if people can really do that. So

SUSAN: Yeah, I wouldn’t be surprised if we go into a w recruit recovery, you know, where we get out of lock up. Everybody goes back to work and, and we start coming out and then, you know, we get hit with a second wave of infection and then we go back down again. But this time I think it should not be nearly as much of a shock. You know, it’s like, okay, we’re going back into lockdown, we know how to do this. And and so I think folks will are, will be more battle hardened to do that. I do worry about our, our small businesses, our, you know, our lovely small business owners, restaurants, et cetera, that, that are really taking it hard right now. And, and so that does worry me that we will lose you know, a set of entrepreneurs, small business owners that, you know, it’s, it’s going to be hard to get them through this. And so that’s, that’s going to be too bad.

PEMO: That’s definitely about our community, isn’t it? The changes that are going to happen that we can’t really envision just yet, but yeah, definitely. So it’s always a delight talking to you and really have learned a lot appreciated and wishing you all the best and all your portfolio companies. And hopefully we’ll circle back and, and check out where we are a bit further down the line.

SUSAN: You bet. Pemo. If there’s anything you need, you just let me know. Okay, great work. Thank you so much again.