Portfolio Triage In A Pandemic World

Everyone is doing their own version of “triage” right now. Let me state upfront – I recognize using medical terminology to discuss non-medical emergencies during a public health crisis is not ideal. To be clear, it is not my intention to equivocate the portfolio “triage” being done now with the medical suffering going on around the world. However, this is the language many in the startup industry uses colloquially to discuss this activity, and so it’s in that spirit I’m writing in this manner. Thank you for understanding.

Over the past few weeks for those in the startup ecosystem – founders and early employees, investors, and limited partners — everyone has been conducting their own form of portfolio triage. CEOs and executives are scanning credit card bills, renegotiating contracts, learning about “force majeure,” bracing themselves for depressed sales and, even more painfully, increased churn. The worst, of course, is planning for reductions in force — for the past few weeks, every Monday and Friday generate rumors of pink slips. Limited Partners, the entities which provide the capital source for these companies, are undergoing their own triage efforts — it could be a nonprofit which needs to loosen funding for specific portfolio initiatives and/or can no longer fundraise via traditional in-person event channels; it could be a university which has sent students home, had to fire administrative staff, and may also manage funds for the school’s hospital systems; or it could any other large pool of capital undergoing simultaneous shocks from either public markets and/or commodities markets (like crude oil). While those limited partners are often more diversified with respect to risk than a startup founder, the same muscles are being used to conduct triage.

As a bit of word-nerd, I wanted to know specifically what “triage” means – “(in medical use) the assignment of degrees of urgency to wounds or illnesses to decide the order of treatment of a large number of patients or casualties.” This is what investors are doing, too.

Investors with portfolios across different vintages are currently inundated with responding to this shock by going through each portfolio, determining the relative health of each investment, what the potential value could be (now likely with a mark down). For funds with a history, the portfolios can be large enough that it could take a few full days just to go through the lists for a first scrub. The medical illnesses investors are trying to quickly assess relates to burn rates and runway, combined with methods to reduce burn while planning for lower revenue income. This double-whammy can quickly compress runway, and the rate of compression is faster for larger, high-burn (ie high-growth) companies and/or those which boast business models that are smack dab in the middle of this demand shock.

Once investors sort their portfolios by those companies deemed highest-risk, the hard conversations begin. We began our targeted outreach at Haystack today. Prior to this, we surveyed our founders, collected standardized information related to cash on hand, current burn, target burn, potential loss of revenue, and headcount. With this data, we loosely approximated which companies were at highest-risk levels of runway compression. Haystack is not a huge fund nor typically a lead investor (though in the past year, we have been leading more deals with stronger reserves), so sadly we cannot open up older funds (which never had reserves) or bridge someone for two years. We wanted to assign a rating of Level 1-4 (with 4 being highest risk) to our portfolio and began targeted outreach today. While these are investments we’ve made, these are not our companies, we are not control-investors, and in 80% of cases, these founders have taken much larger follow-on checks from much larger funds.

There will be hard conversations around these runway tactics. I do not envy anyone facing those. Over the past year, my two young sons have been obsessed with learning about dinosaurs. So, I’ve re-learned about dinosaurs with them. I didn’t really keep up with all the new discoveries since I was 5 years old. Going down the YouTube rabbit hole, my kids are obsessed with the large asteroid which slammed into earth that caused a massive explosion, earthquakes, and disruption to the planet, where a high percentage of species met the end of life. It is so random to think about how that situation escalated for the planet and the dinosaurs. I know our planet has had other pandemics and survived, but this current pandemic sort of feels like that asteroid in some ways — very few people could have even fathomed it, and when it hit, it hit quickly and life will just feel different after the fact. In our current pandemic, sadly we will lose loved ones, brothers and sisters; we will lose a mind-boggling number of small businesses, especially those in the services sector; and we will lose a bunch of very early-stage companies that won’t have enough runway to survive, or startups which are focused on certain industries which have just stopped outright, or startups poised to IPO this year or next who are burning lots of cash and can’t course-correct fast enough. The current pandemic feels like that asteroid to a degree, appearing from the sky in a flash, smacking into our world, and changing it forever.

And, so here we are, conducting triage in hospitals, in our local communities, in our households as we are on lockdown, on our balances sheets — at work and at home — and in the world of startups, for portfolio funds and startups. It is all a shock. People are reacting in real-time. CEOs, investors, and LPs will have to make some brutal decisions, where to focus efforts, where to cut ties. There are no great answers. It won’t be fair. But it’s going to happen throughout April and May, and the only thing everyone can control is to conduct those conversations with grace and thoughtfulness given the unprecedented circumstances. And specifically as it pertains to many early-stage dreams that were just getting off the ground, there will be a shortage of ventilators — some will get them, and others won’t. We’ll have to take these harsh decisions in stride — they are not as important as our collective public health, or what is going on in NYC, or what may unfold in Florida or New Orleans. For the foreseeable future, every day is about triage. Triage is the new normal.