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Startup Management Through The COVID-19 Crisis Live Webcast for Founders, Executives, and Investors

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Video here: https://tinyurl.com/vdttey9 (Recorded live on March 25th, 2020)
We covered immediate fund raising, M&A, legal, and operational considerations startup founders and executives need to focus on while navigating through the COVID-19 crisis.

Vitaly M. Golomb is the Managing Partner at GS Capital, will address what to expect in fund raising and M&A, as well as best practices on operations in an uncertain environment.

Louis Lehot is one of the leading corporate attorneys in Silicon Valley and the Founder of L2 Counsel. He will address best practices and key legal considerations.

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Startup Management Through The COVID-19 Crisis Live Webcast for Founders, Executives, and Investors

  1. 1. Startup Management Through The COVID-19 Crisis MARCH 25th, 2020
  2. 2. Agenda 1. The Macro Environment 2. What to Expect in Startupland 3. How to Respond 4. Legal Considerations 5. Q&A 6. Resources & Contacts Vitaly M. Golomb Managing Partner Louis Lehot Founder
  3. 3. Before we start… Slides and recording will be sent out after the webcast Use the Q&A function Contacts: v.golomb@gscap.co and louis.lehot@L2counsel.com
  4. 4. 1. The Macro Environment A drop in business activity Supply chain & industries reconfiguration Some historical context
  5. 5. 53london.edu The economics of a pandemic: The case of Covid-19 Impact on stock marketsIt all started with large declines in the stock markets Source: London Business School - The economics of a pandemic: the case of Covid-19 by Paolo Surico and Andrea Galeotti
  6. 6. In the mean time, total U.S. consumer debt hit levels higher than 2008 Source: Fabrice Grinda - The global economy and its impact on startups in the time of COVID-19
  7. 7. U.S. corporate debt now exceeds prior peak at housing bubble Source: Fabrice Grinda - The global economy and its impact on startups in the time of COVID-19
  8. 8. 50The economics of a pandemic: The case of Covid-19 A major recession coming oll of top economists: ajority of European and US conomists predict major ecession uropeans have a stronger view an US ess clear in emerging markets voxeu.org/article/economic-impact-pandemic-igm-forum-survey (12th March) Source: London Business School - The economics of a pandemic: the case of Covid-19 by Paolo Surico and Andrea Galeotti We are going into a major, global recession
  9. 9. 59london.edu The economics of a pandemic: The case of Covid-19 The most affected sectors McKinsey Global report (9th march 2020) Source: London Business School - The economics of a pandemic: the case of Covid-19 by Paolo Surico and Andrea Galeotti All sectors impacted, some severely
  10. 10. 55The economics of a pandemic: The case of Covid-19 Impact on restaurants com/state-of-industry Source: London Business School - The economics of a pandemic: the case of Covid-19 by Paolo Surico and Andrea Galeotti All sectors impacted, some severely 56london.edu The economics of a pandemic: The case of Covid-19 Impact on durables expenditure In face of negative income shocks, one of the first and strongest response of households with high marginal propensity to consume is to postpone vehicle purchases. Increase in uncertainty is likely to have a similar effect that works via a precautionary motive. Evidence (from projects funded by ERC grants): U.S. - Misra-Surico (2014, AEJM), Italy - Surico-Trezzi (2019, JEEA), U.K. - Cloyne-Ferreira-Surico (2020, ReStud) Data on China suggests overall impact will be extraordinary large! Unfortunately, this is only the direct effect. More on this later.
  11. 11. london.edu The economics of a pandemic: The case of Covid-19 Impact on the supply chain cont’ed Source: London Business School - The economics of a pandemic: the case of Covid-19 by Paolo Surico and Andrea Galeotti Supply chains will also be affected
  12. 12. Source: London Business School - The economics of a pandemic: the case of Covid-19 by Paolo Surico and Andrea Galeotti Labor markets are unequal and will change forever 65The economics of a pandemic: The case of Covid-19 earners more likely to work from home ould work LS ross ndustry or: % % % tm) 66london.edu The economics of a pandemic: The case of Covid-19 Strong heterogeneity across sectors Most workers in manufacturing, retail, leisure, construction and transportation and utilities can hardly work from home. Source: BLS (https://www.bls.gov/news.release/flex2.t01.htm)
  13. 13. 64f a pandemic: The case of Covid-19 re likely to work form home es-work-from-home-policy-ford-general-motors) Source: London Business School - The economics of a pandemic: the case of Covid-19 by Paolo Surico and Andrea Galeotti We will likely see long-term changes 68london.edu The economics of a pandemic: The case of Covid-19 Source: World Economic Forum (https://www.weforum.org/agenda/2020/03/3-ways-coronavirus-is-reshaping-education-and-what-changes-might-be-here-to-stay/) Home schooling, internet access and education More than 770 million learners are now being affected by school and university closures (United Nations). School closing: “home-schooling” and on-line tutorial • Empirical studies show strong impacts of quality of parental education on pupil educational attainment and long-term outcomes (Heckman, 2006) Science Hence, School closing will reinforce this inequality • Access to on-line resources not universal: Between 56 million and 80 million people in China reported lacking either an internet connection or a web-enabled device in 2018 (NY Times, March 17) 10% of Households in UK have no internet connection. • The closures could disproportionately affect children from poor and low-income families, many of whom receive their weekday breakfast and lunch and, in some cases, dinner on campus (LA Times, March 13).
  14. 14. 74The economics of a pandemic: The case of Covid-19 Supply vs demand GM poll of top economists uggest that impact of emand shock will be larger han that of supply voxeu.org/article/economic-impact-pandemic-igm-forum-survey Source: London Business School - The economics of a pandemic: the case of Covid-19 by Paolo Surico and Andrea Galeotti Reduced spending will have the largest economic effect
  15. 15. But history should make us optimistic Source: Fabrice Grinda - The global economy and its impact on startups in the time of COVID-19
  16. 16. 2. What to Expect in Startupland Slow down in business Customers going out of business Slowdown in funding & exits Slowdown in online advertising Cheaper office space Cheaper/easier to hire
  17. 17. There will be a slowdown in funding & exits Source: Fabrice Grinda - The global economy and its impact on startups in the time of COVID-19 US VC Deal Activity
  18. 18. Slowdown in venture activity already here Source: Pitchbook Global VC deal volume
  19. 19. What’s happening in emerging growth companies 54% closed all offices worldwide 46% have required or mandated WFH policy 37% suspended all domestic work travel 3% have received a positive COVID19 test 8% of employees awaiting a test result 69% moved interviews to a virtual environment 22% have delayed new hire start dates 2% requiring temperature checks for employees 6% provided WFH meal reimbursements 16% WFH furniture reimbursements 2% provided a childcare stipend Source: Tech GC survey
  20. 20. What’s happening in M&A deals M&A deals have softened, deals being renegotiated, terms becoming draconian Reps & Warranties Insurance tougher to get, COVID-19 exclusion Seller response:  insertion of the “COVID-19 qualifier”: if the reps become untrue due to COVID-19, you assume the risk. Pause by private equity to reassess the portfolios Strategics still proceeding, mostly
  21. 21. M&A deal terms to watch for Purchase price adjustments for decrease in working capital Focus on force majeure clauses in customer/supplier contracts Focus on insurance coverage for COVID-19 Focus on cybersecurity Focus on employee due diligence Timing delays expected – push the outside date “Material Adverse Change” definition (must be durationally significant >1 year, specific to target Interim operating covenants (sellers need flex to respond to COVID-19)
  22. 22. 2. What to Expect in Startupland Slow down in business Customers going out of business Slowdown in funding & exits Slowdown in online advertising Cheaper office space Cheaper/easier to hire
  23. 23. 3. How to Respond Cut costs immediately Develop crisis communications plan Take care of your team Delay hiring until it hurts Expect worst case scenario sales Rethink business models and look for new opportunities Be alert and ultra disciplined
  24. 24. 4. Legal Considerations Rounds in process Investors backing out, convertible notes terming out, and other “coincidences” Employees and contractors Vendors Customers Regulators and Government
  25. 25. Q&A Vitaly M. Golomb Managing Partner Louis Lehot Founder
  26. 26. “Accelerated Startup” in book, ebook, and audio book: https://www.amazon.com/dp/0998406309 Protecting Contracts in the Age of COVID-19: ‘Material Adverse Change’ Clauses https://www.ipwatchdog.com/2020/03/18/protecting-contracts-age-covid-19-material-adverse-change-clauses/id=119904/ London Business School Slides and Resources: https://sites.google.com/site/paolosurico/covid-19 Sequoia Founder Letter: https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753 Mark Suster Presentation: https://www.slideshare.net/msuster/funding-in-the-time-of-corona-virus Fabrice Grinda Article: https://fabricegrinda.com/the-global-economy-and-its-impact-on-startups-in-the-time-of-covid-19/ NFX - 28 Moves to Survive (& Thrive) in a Downturn https://www.nfx.com/post/28-moves-survive-thrive-downturn Vitaly M. Golomb v.golomb@gscap.co Louis Lehot louis.lehot@L2counsel.com

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