First of all we hope you are safe and healthy out there!
Much is being discussed about the impact of the Covid19 situation on our domestic VC ecosystem and startups. Tesi is contemplating various lines of action to address the funding gaps emerging in the Finnish economy. Our team is naturally concerned of the potential damage this severe downturn has to our VC ecosystem which has thrived until now. Here we would like to share some thoughts about our response to the situation.
Various advice to companies has been given through various channels already and I am sure all management teams and boards are aware of the acute need to preserve cash and runways whenever possible. All of our companies are urgently making assessments on whether the previous assumptions on revenue growth are still viable (most probably not). Practically all companies therefore look at ways to adjust costs – often first by postponing growth related investments and sales and marketing costs, however depending on the gravity of the impact also wider cost saving actions may be necessary. Companies will face tough times but most importantly the management teams should demonstrate strong leadership, maintain employee morale and strategic clarity, bearing in mind that often the best companies are created during economic crises.
Inevitably, VC fundraising will become much more difficult – how much, remains to be seen. As we know we have been quite dependent on international capital especially in later stages, and this source of capital is clearly at risk. Tesi’s commitment in this exceptional situation is that we will intensify our efforts on all fronts. We have always considered our role in the VC ecosystem as a counter-cyclical investor - while we have remained active in making new investments also during the recent “happy times”, it is now in the new circumstances that our role is likely to become more pronounced.
Essential part of the VC model is that not all companies survive and we do not attempt to change this. Therefore we will prioritise our efforts and investments into companies (whether in our own portfolio or in the wider ecosystem) that have demonstrated a viable business model and positive valuation development prior to the crisis, but are facing an urgent capital need because of sudden changes in their business environment, investor activity or both. Our job is to figure out together with the management teams and our co-investors what is the new realistic basis for the growth of the business, and the appropriate funding solution to make it happen. In addition to looking at historical merits of the business we will of course need to be comfortable that the growth can be re-established – there should be a “U-curve” instead of “L”. We will have to say no to many requests but when we do, our duty is to be clear in the reasoning.
What does this mean concretely? In terms of our approach towards funding rounds, we will stay true to our principle of maintaining market neutrality i.e. investing at terms that are considered “market” – whatever that is in the current constantly changing environment. We are fixing the issue of availability of capital, not providing capital at more favorable terms than a private investor would do. We can however accept somewhat higher risk, and in selected cases take more than our pro rata in a follow-on round or be the largest single investor in a new VC funding round, which we have hesitated to do previously. And since genuine growth-oriented A and B rounds will likely become more difficult to raise, we are contemplating to more actively provide bridge financing, alongside existing professional VC investors, to companies whose fundraising plans are being disrupted or delayed. This will change our approach to making new investments. In addition to doing a few deals per year with a “full blown process”, we will perhaps use standardized terms and a leaner process to cope with the increased volumes – more details about this to follow.
We are, as always, at your disposal to discuss and keen to hear if this approach makes sense and carries the impact we hope to achieve.
Juha & the VC Team at Tesi