The Courrier Thu 23 Apr 2020 podcast: Paul Murphy is a general partner at venture capital firm Northzone, Paul previously worked at Microsoft and was founder and CEO of the mobile games company Dots, in NYC. You can listen to the full episode here.
What are VCs doing right now?
I’ve spoken to quite a few investors over the past month, and 95% of them are focused on their existing portfolio. It’s been stressful because you want to focus on your family and health, but you’ve got great companies that could blow up. I’ve probably worked more this month than any month in the past year.
So you’ve been working with your portfolio rather than hunting for deals?
Yeah, 100%. I was straightforward with the companies I was talking to and said, ‘I can’t focus. I want to fall in love with a company but I can’t develop that emotional attachment right now’. Only recently are we starting to have great conversations with founders again.
Will the winning companies be those with the biggest cash runway?
Be more conservative on burn rate, just in case [the crisis] lasts a bit longer than everyone plans. Of course, there are some areas where more capital gives you a strategic advantage. But for most software startups, for example, where there’s a high gross margin and most of the burn is in people or engineering costs, I don’t think capital will necessarily be a competitive advantage.
You were once a founder. What kind of founder will survive this?
The ones that had really strong discipline pre-pandemic.
Post-pandemic, will VCs become more important than ever or will founders bootstrap more?
There’s a subset of founders who view the endgame as a big splashy financing round. But if you’ve been there before, the dopamine hit will last 10 minutes. Then you have the burden of all this capital, really high investor expectations and maybe some exits are off the table, which could have made you incredibly wealthy but are no longer appealing to your new investors. On top of that, any founder that needs to raise capital now will see the effect of dilution and potentially some punitive terms. Some founders will come out of this and say, ‘I don’t want to be dependent on raising a Series C, D or E. I want to build a business that’s profitable and then opportunistically raise capital to put fuel on the fire instead of doing it just to survive.’
Will DTC companies with a super high cost per acquisition soon find themselves completely screwed?
Selling something at a slight loss today with the hopes that margins will improve in the future isn’t a great strategy. That being said, people aren’t leaving their homes so they’re buying more online. And second, big advertisers have cooled down their ad spend, so there’s a suppression across the board in ad auctions and on marketplaces like Facebook and Google. Many of these DTC companies are seeing their customer acquisition costs go down at a time when people are buying more. So there may actually be a sort of short-term surge for some of these companies.
Any final words of advice for founders?
See this as an opportunity to regroup. If you’re in a heavily competitive dynamic, know that all of your competitors are also regrouping. Take a deep breath, think about what you really need and stay the course.