Startups

Capital in crisis: How these Philly founders and investors pushed through the pandemic

The early days of 2020 meant protecting the portfolio and an eventual VC boom. The lesson: "Survive first, then thrive."

Money!

(Video by YouTube user Imagine Hafakot, used under a Creative Commons license)

While just about everything was unpredictable in the year 2020, venture capital trends looked extra surprising.

While the first half seemed like a wash, Philly startups ended up raising an impressive amount of capital in late 2020. Companies raised something like $1.8 billion across more than 200 deals by the year’s end, recording the region’s second-highest annual deal value and third-highest deal count to that date, despite the pandemic’s economic impact.

But it makes sense that when a global crisis strikes, VC and startups take a shock to the system. In those situations, companies either sink or swim, we heard at Philadelphia Alliance for Capital and Technology’s (PACT) 2022 Capital Conference last week. During a panel, investors and the founders of companies in their portfolio talked about how they made decisions in those early, pivotal moments of the global crisis.

Survive, then thrive

Nate Lentz, managing partner at Osage Venture Partners, said in these cases, it can be best to get a bit conservative.

“Entrepreneurs are natural optimists,” Lentz said. “But survive first, then thrive. If you don’t do that, you can get yourself into odd situation.”

Marissa Evans Alden, CEO and cofounder of eight-year-old, NYC-based tech education startup Sawyer, said her team scrambled in early 2020 to respond to school moving online.

“Our business was very much coming to a halt,” she said. “We and everyone else evolved to online classes, for another year or so. But we were doing that because we had to. It was a strategy in a moment in time.”

In the first week of March 2020, Evans Alden said the company’s CTO got word of closures heading toward the city, and the team “built like they’ve never built before.” It rallied the team in a good way, the founder said, reminiscent of early startup days of dropping everything to create something new: “Crisis can really bring people, especially your team, together.”

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Cash flow check

One of the biggest capital lessons Evans Alden said she learned during this time from investor Advance Venture Partner was the importance of being cash flow positive going into a difficult time. The company had raised $11 million in 2019, but when the pandemic hit, the team narrowed their spending. That allowed them to scrutinize what they were working on and get to the core mission of the company.

They ultimately took on a bit of debt and got a Paycheck Protection Program (PPP) loan, but that advice to get serious about spending lead them to really understanding the core of their product, Evans Alden said.

“That’s been a big blessing in this cash flow market,” she said, “getting serious about how to make money. It’s allowed us to have more freedom and flexibility in the choices we make.”

Advance partner Courtney Robinson noted that the runway conversation is especially important as the VC market changes again. After a year or so of tech companies being able to raise higher and higher amounts — in some cases, “bloated” might be another way to put it — they’ve gotten accustomed to burning through money quicker.

“That’s always been the issue, of how much do we have left and how much can we raise?” Robinson said. “There’s the conversation around runway, and sometimes it doesn’t work. Another really important but hard part of this job is knowing when that is, and knowing when to double down.”

Discipline amid demand

Philly founder Shiva Srinivasan, behind Zuppler, which makes a white-label ordering platform for restaurants, said his was one of the odd companies that the pandemic quickly accelerated, instead of hurting it. Within days of the virus reaching the region, Zuppler’s order number doubled, she said. Suddenly, they were scrambling.

“We wen’t prepared for the amount of leads coming in,” Srinivasan said.

After bootstrapping the business for eight years, when Zuppler did go to raise capital a few years ago, it kept getting turned down, he said. The company got to $1 million in revenue, started pitching investors — but kept hearing no. Eventually, it got a bid from Ben Franklin Technology Partners, but the “no’s” were also a chance to zero in on the business.

“I was saying to my team, ‘Let’s change, get more discipline,’ so that we don’t have to rely on capital,” he said. “We don’t need 50 people in sales, and we built a long-term strategy. Without the pandemic, we wouldn’t have thought about those things. Because we did that then, it helped us survive.”

A lifeline

When the pandemic hit the region, they’d already done that zeroing in, Srinivasan said. But the relationship they’d built with investors at Ben Franklin, like with Doc Parghi, became an advice lifeline.

“In early-stage [investing], every day is a crisis,” Parghi said. “We’re used to it. What we also love about Shiva is his ability to pivot.”

Parghi helped with PPP applications, and didn’t need to ask the team to cut costs to break even, he said — Srinivasan had already done it.

“Every founder needs something different from you,” the investor said. “I realized quickly that Shiva just needed a sounding board, but he knows what he’s doing.”

Protect the portfolio

Parghi shared his experience on decision making in the early days of 2020 when everything seemed uncertain. Ben Franklin had last-minute pulled a plug on a company’s investment because they didn’t know what would happen with the market.

“We had to protect our portfolio first, he said. “Seven months later, we did invest, but we needed to check on our own first.”

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