Investing in a Time of Near Complete Uncertainty

People have begun speaking about the new normal that will exist after the Covid-19 period subsides and how many things will change – how will we recover and take care of the people affected directly and indirectly, how we will work, how we will educate, how medicine will be delivered, how much we will or won’t value office space, how quickly infrastructure will move to the cloud, how our supply chains will realign, how we force our governments and our corporations to plan for and prepare for the next grey rhinos, and so much more.   But how about the decisions we make during this period of uncertainty before the new normal takes shape?  How is one to make critical decisions when so much uncertainty exists about the severity and the duration of not only this pandemic crisis but also the state of the world and the state of the economy once the crisis abates?  We have certainly tried to create a point of view at Osage Venture Partners when considering making venture investments.  Investing in a time of near complete uncertainty will be a test – especially if our goal is to be fair to entrepreneurs and sensitive to the risk profiles of our own investors.  However, we are up to that test and remain open for business to entrepreneurs seeking capital in this uncertain time.

Companies we are speaking with in this environment have been rewriting their 2020 projections to reflect the world we are living in today.  Many see the current environment realistically and have been assuming Q2 and Q3 will deliver almost no new business, at least when it comes to enterprise buying cycles.  Q4 projections in these models most often see a rapid return to business as usual, and 2021 picks up where 2020 growth rates were expected to be before the crisis.  Some companies – such as those in remote education or telemedicine – see the current environment as an accelerant and keep plans the same or increase growth targets.  A majority of the companies recognize a need to model a two quarter set back and then assume a return to the world we knew three months ago.

As investors we are forced to think about discontinuities in the economy and in sectors of the economy in ways we have not had to do for quite some time.  It is not just about the team, the market opportunity, and the business model and the moat it creates.  We now need to face a different set of questions:

• How long will this Covid-19 effect last and how long will that freeze buying cycles?
• What will the economy look like 12 months from now? Will we re-enter a period of sustained growth or will we come out of this pandemic into a multi-year recession?  How will this impact different industries and sectors of the economy?  How financially broken will our healthcare, local government, universities and colleges, retail, consumer, and manufacturing sectors be after this crisis, and how long will each take to recover?
• What is the impact – positive and negative – of $2 trillion to possibly $4 trillion in stimulus and what will be the second order effects – inflation, tax policy, etc.?
• Will companies that take federal incentives to support jobs be inclined, or allowed, to adopt technology that drives cost efficiency at the sake of current or future job creation? Will there be a reconsideration in society of the trade-off between the efficiencies driven by automation and the displacement of labor, which had been tilting in favor of automation?
• How will business spending behavior change in a post pandemic world – especially as it relates to technology adoption?
• How do we value a company that has gone from projecting well over 200% growth for 2020 to growth well below that even with plans that might look optimistic?
• How do we support the critical capital requirements of great entrepreneurs in this time of uncertainty as other capital sources are justifiably pulling back, and how do we do so in a way the treats entrepreneurs fairly while ensuring that we are responsible fiduciaries of our investors’ capital?

At Osage Venture Partners, we do not know yet how to answer all of these questions, but we are willing to work with entrepreneurs to structure viable financial terms in a time of considerable uncertainty.  We think such structures will look different than how we were funding deals even three months ago.  Expect our guidance to be toward the following type structures:

• Smaller round sizes – maybe 50% of what your investor presentation said you were raising
• Meaningfully lower 12-month growth expectations that assume a modest recovery and expense models that do not overspend hoping higher growth will come
• Convertible notes with caps and discounts but fairly long maturity dates to allow for a priced round in a period that has hopefully reached the new normal
• An expectation that many of these rounds will be supported by an intention by Osage to lead the priced rounds once the new normal is achieved (of course that is always at the option of both Osage and the entrepreneur)

We are investing in a time of near uncertainty but we still know great entrepreneurs will build great businesses that address the needs of the new normal, and those companies that survive this period are likely to emerge battle-hardened, resilient, and more confident in achieving success.  We also know that being transparent with and fair to entrepreneurs is what we have been known for and how we will continue to operate going forward.