The COVID-19 pandemic that dismantled daily routines and hammered the economy has forced investors to pivot along with the companies they back financially.
Venture capital and private equity investors contacted by MiBiz say they’ve advised portfolio companies to stay safe, preserve cash, control expenses and capital spending, secure revenues, assess the effects, and continually revise projections based on the data they see.
Investment firms say they continue to scout for new deals, although some are generally doing so at a slower pace. Their immediate priority is to focus on portfolio companies in which they have already invested to help them navigate the crisis, and in some cases provide an injection of capital.
“The crisis certainly caused a sudden change in the way we all work and live. Its impact jolted us and our portfolio companies. We immediately shifted into crisis management mode and began working each step of the process in parallel,” Tim Parker, the president of Grand Rapids-based Grand Angels, wrote in an email to MiBiz.
“One aspect of our role is to help companies deal with the current realities and at the same time help them visualize how we will steer out of this fog,” Parker said. “Sometimes, it is difficult for a small company in the trenches to see the entire battlefield. We can provide that vision and bring best practices, along with resources to help them develop and implement safe and smart strategies.”
Grand Angels has angel investor groups in West Michigan and affiliates in Kalamazoo, Detroit and Flint.
The investment firm closed in late December on $11.7 million raised from nearly 100 investors for a new venture capital fund, Grand Angels Venture Fund III LLC.
“This means we have capital available and we will continue to invest in early-stage Michigan companies, although more selectively and cautiously. Some of our members may become more cautious, although we expect to see companies needing capital who have solutions to solve our country’s newest needs,” Parker said. “Our intention is to continue leaning forward with due diligence and investment. While overall deal flow may slow for a while, we are already beginning to see some exciting projects.”
Meanwhile, Grand Angels has paused the formation of new affiliate angel groups. Most recently, Grand Angels formed Flint Angels under the Michigan Capital Network umbrella, which also includes Kalamazoo-based Ka-Zoo Angels and Detroit-based Woodward Angels.
“If there is one way we will slow over the next several months, it will be in regard to adding new angel groups,” Parker said. “We will still embrace adding new groups, but will use this time to raise the bar, focusing on excellence and execution.”
Support the portfolio
At Wakestream Ventures LLC in Grand Rapids, “we’re pretty much following the playbook” of a lot of venture capital funds, said Finance Director Joe Lampen, who’s involved in portfolio company management.
Once it became apparent that the pandemic would create major economic disruptions, Wakestream advised portfolio companies to evaluate “where they thought the impact was going to hit them,” formulate near-term revenue projections, plan for a worst-case scenario and “understand where that left them from a cash position,” Lampen said.
“Most of the startups that we’re working with obviously are intentionally high-growth businesses, and high-growth businesses burn cash. The unit economics work out, which is why we’re investing in them, but they’re intentionally trying to grow quickly so their expenditures exceed revenues,” he said.
Wakestream has more than 50 portfolio companies across four funds.
A handful of Wakestream’s portfolio companies recently raised capital, “so they’re probably sitting pretty well,” Lampen said.
The startups that were in the process of raising new capital and were “at the end of their cash runway” are getting first consideration for further investment from Wakestream to “make sure they have cash to be in survival mode,” Lampen said. The venture capital firm wants its startups to have enough cash on hand or earmarked to get through the next 12 to 18 months, he said.
“Some companies, we’re working with them very closely to figure out how to get them cash or how to preserve cash,” Lampen said. “In all scenarios, we’re (working) with companies to make sure we’re making prudent decisions on how to preserve cash. In some cases, we’re investing in companies to make sure they have the cash to weather this at least for the foreseeable future.”
Some of Wakestream’s portfolio companies are thriving right now because they offer products or services “that really help or assist companies or organizations and individuals to continue with life” through remote activities, Lampen said. He cited MaxOne LLC, which offers an app to allow high school and college coaches to stay connected to athletes with training and workouts.
Beyond supporting existing portfolio companies and proceeding with deals already in the pipeline, Wakestream has been limiting new investments.
“We are being pretty frank with founders who are coming to us for new capital that we’re focused on our current portfolio. We’re interested in learning for when we come out of this, but we’re making very few new investments,” Lampen said.
A quarterly report expected this week from the National Venture Capital Association and PitchBook could provide an indication of the COVID-19 pandemic’s effect on the industry.
Worldwide, the London-based data analytics and consulting firm GlobalData plc reported that VC deal flow for the week that ended March 29 was down 22.5 percent from the prior week.
Private equity firms also are looking at how they can assist their portfolio companies as they still look for new investment opportunities.
At Ada-based LV2 Equity Partners LLC, “our attention has certainly turned inward to our portfolio companies. Guiding them through this uncharted territory is without a doubt our number-one priority,” Managing Director John Pollock told MiBiz.
“That said, we haven’t stopped looking at opportunities, but the incoming flow of those has slowed,” Pollock said. “The reality of the matter is that it’s tough to underwrite and value transactions right now with the lack of clarity at play, combined with its unknown duration. As such, our entire new deal process has slowed, but we have not shut it off.”
Private equity investors in the U.S. put $309 billion in 4,788 businesses last year, according to the American Investment Council, a national trade group for private equity.
In a recent paper about the effects of the COVID-19 pandemic on private capital markets, Pitchbook said “capital is likely to be deployed, albeit more slowly and perhaps more prudently than in the last few years.” Pitchbook noted that “as consumer spending and business investment are set to decline, we believe we will undoubtedly see a slowdown in PE transaction volume to follow the expected economic contraction.”
Grand Rapids-based Blackford Capital has advised portfolio companies to “get prepared” for the harsh toll the pandemic is taking on the U.S. and global economies.
“This is a unique, historic event. We think it’s going to be pretty deep and we are telling our portfolio companies to prepare,” said Blackford Capital founder and Managing Director Martin Stein. “It is going to have economic consequences that will last a long time.”
In an updated U.S. economic outlook issued last week, Comerica Inc. projected Real GDP to decline 29.1 percent for the second quarter alone, following a 4.1-percent decline for the first quarter.
“The coronavirus pandemic has rapidly evolved into a profound economic event. We expect second quarter real GDP in the U.S. to contract at the fastest rate recorded since World War II,” Comerica economists wrote in the outlook, which presumes the pandemic will fade with the warmer temperatures of summer.
Given that assumption, Comerica projects Real GDP to grow 6.3 percent in the third quarter and 12.4 percent in the fourth. Unemployment nationally will surge from 3.8 percent to 10.8 percent for the second quarter and to 14.7 percent by the fourth quarter, according to Comerica.
Blackford Capital has 12 portfolio companies. The firm has three companies under a letter of intent “that have absolutely been impacted by what’s transpired,” Stein said. Other companies are doing well, and some are going through refinancing or proceeding toward an exit. The crisis has clear complications for those deals, although Blackford Capital intends to proceed, Stein said.
“It is really hard to underwrite at this level of uncertainty. You don’t know if you’re underwriting for two months of losses or two years of losses,” he said. “We’re still planning on being creative and still planning on pushing ahead. We have not killed our letters of intent, but we have said, ‘Let’s stay connected, let’s develop the relationship and let’s find a way to do it.’”
Grand Rapids-based Auxo Investment Partners also continues to “look for opportunities in this turmoil” while making sure portfolio companies are positioned to weather the storm, according to Managing Partner Jeff Helminski.
“We’re in a strong financial position and we’re hopeful that it will lead to opportunities, whether that’s organic growth or acquisitive growth at the existing companies we have,” Helminski said. “But at the same time, we’re still looking for new platforms; we’re active. From a big picture perspective, we’re still aggressive in the market pushing forward.”
Auxo presently holds six portfolio companies across four platforms. The private equity firm just signed a fourth letter of intent to go with three that were in place before the pandemic hit. The firm is taking a “little different approach to each one of those” to gauge the pandemic’s effect on them, Helminski said.
One prospect “is not at all impacted by coronavirus, so that one is full steam ahead,” he said. Another prospect may be affected by the pandemic and the decline in oil prices. That deal “is essentially on hold until we get some more visibility on what that really means for them,” Helminski said.
In the two other companies under letters of intent, “we’re pushing diligence forward at a little more metered pace than we might normally, and we obviously have a number of new considerations in the diligence category that we have to navigate now that we have to understand,” he said. “But they are both very good, long-term businesses that we’d like to be the owners of. We’re continuing diligence to get the ball to the two-yard line so that when the smoke clears on the coronavirus impact, it’s a short putt to get it across the goal line.”
Portfolio companies are planning and developing scenarios to figure out the effect the pandemic could have on their businesses and what actions are needed, said Chris Merendino, a vice president at Auxo who focuses on operations and management of portfolio companies.
Auxo holds regular meetings with portfolio companies, which allows them to share information and best practices for employee safety, cleaning facilities, and ensuring “the messages are getting down to the operators so that everybody understands what’s going on with the company, with the world, and with the policies,” Merendino said.
“The key is to not get into a situation that you hadn’t thought about at some level and to make sure you have accounted for every scenario you could possibly think of,” he said.
Auxo also maintains regular contact with lenders so they understand what steps have been put into place at portfolio companies, their status, performance and cashflow, Helminski said.
As firms work through the pandemic and guide their portfolio companies, constant communication has taken on greater importance, particularly at a time when people are working with heightened anxiety about their safety and uncertainty about the future, said Jack Kolodny, a managing partner at Auxo.
Maintaining open lines of communications also brings an occasional bright spot.
Kolodny tells of an Auxo portfolio company that makes cutting tools and got a “really terrific note from one of their customers that said, ‘Hey, do you guys know that you’re helping us make these test kits for coronavirus and all of the PPE being used out there?’”
“That is a huge morale booster in difficult times to know that somebody who is operating a mill understands that they are actually having an impact on the safety and welfare of people,” Kolodny said.