An Update For Our Portfolio Companies
A note from CoinShares: Meltem Demirors has invested in over 150 companies within the digital asset ecosystem since 2015 - first at Digital Currency Group, then her own firm, and now at CoinShares. She has weathered many storms in the digital asset market alongside her portfolio companies, and shared the below guidance with CoinShares portfolio companies following last week's market turbulence.
We've shared it here in case it's helpful to you.
We’re living through a series of events that are chaotic, confusing, and unprecedented. We have a global health pandemic happening in a low to negative interest rate environment with unprecedented levels of quantitative easing coupled with a re-pricing of commodities and assets wrapped up inside of an unusually contentious election year which is surfacing a number of political, social, and economic issues. It’s scary, confusing, time consuming, and just downright weird.
In these trying times, a fear-based mentality is common. Most of us will be either too cautious or too aggressive, myself and the CoinShares team included. We have to take a step back and look at the facts, and to respond to these facts in a calm, organized, and logical manner.
The world is not going to end. Not today, not tomorrow, and not the day after. So what we need to focus on is doing our job, to the best of our abilities, during these trying times.
- For us as investors, it means protecting you – our portfolio companies – and doing our best to help you weather this storm. It means being prudent and opportunistic in how we deploy capital, and focusing on doing our job – delivering cash on cash return to our investors. We do this by finding great companies and funding them at valuations that allow us to materialize a high multiple on capital invested.
- For our founders and execs, it means protecting yourself, your team, your bank account, your revenues, and your financing plans. It means preparing in an environment with a massive lack of certainty, and optimizing your chances of success across a wide probability distribution of possibilities.
We’ve been talking to investors and companies for the last two weeks, and here’s a summary of the practical guidance we’ve gathered.
- We are no longer in peacetime. We are now in wartime. Your tactics have to change, and your number one focus should be keeping everyone focused on the mission and executing relentlessly.
- You cannot lead your business if you are unwell. Get enough sleep. Get outside, get some sun. Spend time with your families and loved ones. Ensure you are well and create time and space in your schedule to do the things that nourish you.
- Manage your mental state. It’s never as good or as bad as we think, as this time its no different. We each have our own ways of managing our headspace, and it’s an important time to continue that practice. If you ever want to connect, you can always reach me at [email protected]. I would love to hear from you and exchange thoughts.
- Take your time to analyze and assess before making decisions. It will take time for the effects on what’s happening now to get factored in to the normal cycle of business. Some of it you’ll see coming. Some of it you won’t. I’m a big fan of the investor Howard Marks, and one particular quote comes to mind: “Two kinds of people lose money - people who know nothing, and people who know everything. Have humility.”
Take Care of Your Team
- Your team is probably worried about all of the same things you are, but most importantly, they’re thinking about their job security at an early stage startup. Communicate early, and communicate often. Let them know what’s happening and provide enough transparency to allow them to plan.
- Focus on the mission. Reiterate the mission. Make sure everyone knows the mission. Keep everyone, including yourself, accountable for delivering against the mission.
- If you have to let people go, do it only once, and do it with empathy. Give the team confidence that they can rely on their paycheck for an extended period of time. Be transparent – your team always knows more than you think.
- Stop any management drag by cutting employees that aren’t performing. You need to save your resources, but more importantly, your energy and your team’s energy and focus.
- Offer support where you can. Remote work, flexible hours, and other policies can help people manage their own internal chaos. Everyone’s lives have just been thrown out of order, and a bit of empathy can go a long way.
Take Care of Your Business
- Do whatever you need to get to 12 to 18 months of runway. Gross burn is the metric that matters most right now, and knowing you have it stashed in the bank is a massive stress reliever. Revenue won’t get hit immediately, but as the market digests what’s happening and your customers go through this exercise themselves, expect things to change.
- If you need to make cuts, and we recommend you all do, look across the business and make cuts only once, and do it swiftly and with empathy. Having a plan and sticking to it is important. Communicating the plan to your team and giving them confidence and job security is important.
- Manage your key customer relationships. Make sure you’re communicating with your customers to identify how you can best help them. We’re all living through this together, and your actions are what people will remember. Take the time to build the relationships that will define the future of your business.
- When planning expenses, err more towards variable rather than fixed costs. Look for ways to create optionality and fine-tune in the short term by hiring contractors instead of employees in non-critical roles, leasing space month to month as opposed to fixed contract, and keeping cash commitments flexible.
- Look for places to apply leverage by negotiating. For most of you, the biggest expenses are salary and infrastructure, in the form of compute and data. You never know if you don’t ask, and most things can be negotiated. Even a 10% reduction on a fixed cost can make a big difference.
Take Care of Your Future
- Communicate, and often. I like to use this simple investor update template, and send it at least once a month. I try to speak to my companies at least once a month, and last week, called everyone to discuss gross burn, net burn, cash in bank, and runway. Consider sharing some version of this update with your team.
- If you’re in a fundraising process, talk to your prospective investors and accelerate the timeline to get it done as quickly as possible so you can go back to focusing on the mission. Don’t optimize for valuation at a time when you’re fighting for survival.
- Be opportunistic – businesses will shut down. People you want to hire will become available. What your customers want will evolve and change. Talking to people now, more than ever, will help you spot opportunities and take advantage of them. Make yourself available and be resourceful.
Markets operate in cycles, and we’ve been in an expansionary cycle for an unprecedented long spell – 11 years – and we are now shifting to a different part of the cycle. Where we are in the cycle determines the risk we face, and as early stage companies, you are about as far out on the risk spectrum as an investor can go. Add in digital assets, and you’re off the charts.
But all is not doom and gloom. Investors are sitting on record amounts of dry powder aka cash – according to Prequin, PE and VC firms have $1.5 trillion in the bank, Dan Primack reported venture funds have around $100 billion in new capital raised, and our research shows the top 5 corporations have half a trillion in cash between them. Funds get paid to deploy, not to sit on capital, and funds will continue to deploy. The question is what types of businesses they will invest in.
Now, more than ever, metrics matter. Revenues matter. Costs matter. Margins matter. Markets matter. Focus on the things that matter, because everything else is secondary.
Although we talk to you regularly, you can expect to hear from us more frequently over the next few weeks and months as we settle into this new reality. We’ll keep sharing what we’re hearing and seeing. As we shared on Friday, business at CoinShares continues as usual. The months and years ahead, as we look at a negative interest rate environment and significant levels of quantitative easing across the globe, will be bitcoin's true test. We’ll be here, building alongside you.
Onward and upward!
Meltem & the CoinShares team
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