Five takes from the Kavedon Family on building a solid business during uncertain times — Part 1
Carol Tarr — Portfolio Manager
In these interviews, taken between May and June 2022, four Kavedon Kapital partners and a portfolio manager share their experiences and learnings from previous crises with visions for thriving in current conditions. With multiple crashes weathered between them, they have a broad overview of the effect of cycles on the startup ecosystem, the opportunities they provide and how to leverage all types of conditions for growth, profitability and, most importantly, during these critical periods: survival and renewal.
Key takeaways:
- Get the product out there and get the data points
- Everyone focuses on the land grab and being the best. Now to return to focus on the basics: getting to profitability.
- Maintain hope but don’t rely on it. Strategy is what you need.
- Focus on basics: a daily cash flow and a cash runway report
- This crisis will offer an opportunity to leap the gap to renewable energy, if not circularity
Get it out there and get the data points
- Jeremy Roberts, Partner at Kavedon
In Sequoia’s recent “Adapt to Endure” presentation to their family of founders, they quoted the great Ayrton Senna.
“You cannot overtake 15 cars in sunny weather, but you can when it is raining.”
While there may be opportunities ahead. I would add to Ayrton’s quote:
“Just ensure you don’t aquaplane off the road in the process”.
Having been through the Asian Financial Crisis of ’97, the Dot com crash of 01–02, and the Great Financial Crisis of 08–09, all the signs are there that there is a recession looming (indeed, we may already be in one). One thing is for sure, it is going to be tough, but we WILL get through this; it’s just a matter of how long it will take. Right now, nobody is sure how long — so all you can do is plan for the worst and hope for the best.
In 2008–09, I was an advisor and investor in a manufacturing business. We were amid an acquisition when Lehman collapsed, resulting in many banks effectively shutting up shop early regarding their new lending book. We still managed to obtain debt financing for the deal. How?
1) We made sure the business plan we presented to the banks was robust and compelling
2) We were conservative with budgeting and forecasting — having taken a c. 20% haircut to our base case and ensured there was significant headroom with financial covenants
3) Focus was on the complex synergies (i.e. cost savings, quick wins); while ‘Soft’ synergies (read revenue growth and new products) were not included in the base case but rather highlighted as upsides not included within the plan
4) Risks were identified, and plans elucidated as to how we would mitigate these if they arose
5) We raised more equity funding than initially planned and at a lower valuation than we would have liked — but given the uncertain outlook at the time, we didn’t want to find ourselves in hock to the banks
In the end, the business survived, indeed, prospered, and we sold the acquired business two years later, doubling our monies.
Based on my own experiences, what advice would I give to startups/early-stage businesses?
1. Have a compelling business plan AND act on it
- Need traction and product-market fit in spades
- Have a clearly defined path to profitability. Right now, the way to profitability (near term) is far more critical than growth for the sake of growth
- Get the data. Better to have an imperfect product in the market, in the hands of the consumers, so you can get the critical data points from customer feedback, telling you what works and what doesn’t instead of perfecting what nobody cares about. When money was cheap, there was time to do all that research, but right now, money is expensive (and will become even more so), so make the best use of it
- Be more conservative with your financial forecasting. Always nice to surprise people on the upside and make money.
- Identify risks, and plan how you will mitigate them in the event they arise
- Be realistic on valuation. Better to raise more at a lower valuation than less at an inflated one.
2. Be able to move and pivot quickly
- Realise plans are not set in stone — they may need to change and adapt.
3. Trim excess fat and all that logical stuff. If the team have been successfully working remotely for +24 months, do you need to have that office space?
4. Communicate clearly and regularly with your team. Staff will appreciate the transparency and the clear direction you are taking them in.
Will the recession be different this time?
No, and Yes
No — in all probability, unfortunately, it will be just like the recessions which have gone before.
Yes — it will feel different. This will be the first recession where everything will feel amplified — thanks to the proliferation of social media, Twitter, clickbait news cycles etc. (and they weren’t around anywhere near the current scale at the time of the Global Financial Crisis of 08–09).
Will there be differences between Europe and the US?
Unfortunately, while there may be differing dynamics, in my view, the looming recession will be pretty tough on both sides of the Atlantic.
What the recession will do, and indeed, has already started to do, thanks to the high costs of energy/fuel, is change habits– arguably achieving more than the green lobby ever could!
Daily cash flow, a cash runway report and weekly communications with investors helped us through the dot.com period.
Leslie Maliepaard, Partner at Kavedon
There are a few key points I always return to when a startup finds itself at a crossroads in an economic crisis. The most reliable model one can turn to is for a startup to unpack its business model at various stages in the business cycle when necessary. A recession would be one of those moments.
When I look back at my career as a serial entrepreneur, I weathered a few economic storms and came out the other side all the better. Primarily due to our team’s ability to adapt quickly, plan strategically and think outside the box of the industry logic.
I recall two instances, one as a founding employee of an internet startup during the 2000–2002 Dot.com crash. Later, as a founder of an eCommerce business in South Africa in 2005, we weathered the 2008 recession (and later exited in 2013). In hindsight, I realised that an innovative business model was vital to us finding ways to create value for our customers and capture value for our company.
With the internet startup, I was responsible for setting up and managing the finances and the global merchant banking systems and processes for our international clients. We were fortunate in that we spotted an opportunity during the recession and moved fast to provide our clients with the necessary payment and marketing services before our competitors could even think about it.
We gained a large percentage of market share in a short space of time. Our success resulted from fast and decisive decision-making and the ability to mobilise a disciplined team that worked hard and adapted quickly.
What key factors allowed the team to adapt quickly and find new opportunities?
The adaptability of people and in-house processes enabled us to respond to changes in the distressed market. It allowed us to go after new opportunities by pivoting our business and splitting the key services we provided into two stand-alone companies. One company offered marketing and content creation services, and the other financial and reconciliation services.
To increase our cash flow, we explored how we could get more from our customers. We had two types of customers. We managed money and marketing for our clients and dealt with our client’s customers.
How did we go about innovating our existing business model?
Our goal as a business was to create and capture value. In other words, it’s essential to create value for your customers and retain the value you’ve created for your business; it’s the only way to remain competitive and sustainable.
There’s a famous mantra I love, ‘ Beat your customers without beating your customers’. We sought to improve our service and product offering to retain existing customers and attract new ones. We increased automation which enabled us to scale up when we seized more market share.
How fast does a startup have to change to adapt in trying times?
Super fast, but not without detailed analysis and strategic planning beforehand. Be steady and systematic when doing your research as to how the startup is going to survive. When we saw an opportunity during a hard time, we may have had to create a new department to expand. We hired fast, but we hired the right people through a rigorous hiring process. In other words, we attracted super-smart people skilled at what they did and with the energy to work in a fast-paced startup environment.
Why are financial disciplines essential?
You have to be insanely disciplined regarding financial management; this will help you prepare your company to weather the storms. Daily cash flow, a cash runway report, and weekly communications with investors helped us through the dot.com period to a very successful exit in 2010.
By earning more from our customers and improving systems and processes, we could improve our unit economics and cut any excesses that became redundant.
If you are an Investor realising the importance of switching to a Venture Capital model built on Circular Economic principles, get in touch with us to learn more about how Kavedon Kapital can help.
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