Welcome to the Innovator

Welcome to the June 2020 issue of The Innovator, a monthly newsletter for iiM, LLC. What is iiM? We are a funding platform for early-stage companies in the animal health, agriculture and human health verticals. In this newsletter, we intend to share educational information, ideas and a perspective on the investments we are making. If you do not want to receive this publication, please let us know and we’ll remove you from the list of recipients. Please enjoy this issue of The Innovator.

 

Lydia Kinkade, iiM Managing Director

Leadership in Unprecedented Times 

iiM Portfolio Company, AgriSync, Inc.

By the week of March 15, it was clear the COVID-19 impact on businesses would be severe. The depth and duration of the impact was not -- and still is not -- clear. 

We were fortunate in mid-March to have eleven months’ cash on hand. Our original 2020 plan expected a 40% revenue increase over 2019, with increased growth investments leading to a break-even year overall. We expected most incremental revenue to come from new and expanded enterprise ($100k+ annual) customer relationships. Here is a snapshot of our approach to the circumstances.

First principle: Play offense by resolving to act, not just react. After a couple days listening and watching how our customers might change their decision making, we resolved to move out of wait-and-see mode and take concrete action. We focused on our own control points, which for us meant expenses. Just as a revenue plan is made in the first half of a year, early expense adjustments are many times more valuable and less painful than later adjustments.

Second principle: Enlist all leaders and set a framework. We are small team overall (15 FTE), and it would have been easy to just announce C-level decisions. Instead, all five leadership team members worked to identify and debate expense plan changes by applying three guiding questions. 1) Is this planned spend going to keep or expand current customer relationships? 2) Is this planned spend likely to generate a 2020 invoice? 3) Does this planned spend care for our employees and help them stay focused and optimistic about AgriSync’s long run and their role in it? Using this framework, we remixed our 2020 expense plan and reduced it by 38%.

Third principle: Formalize and track with transparency. We took the revised expense plan, our reduced expectations of enterprise customers’ 2020 purchase decisions, and formally changed our 2020 financial plan. The revised plan now guides all company activity and board oversight for the rest of the year. We also made the revised Q2 expense plan one of our handful of official company KPIs for the quarter, ensuring it would be reported against weekly in our all-hands team huddle.

 

Fourth principle: Empathize with customers as early and as much as possible during chaotic times. For us, this meant immediately embracing a full work-from-home setup. We then put nearly all our daily energy into connecting with customers to ensure they were leaning on AgriSync’s platform to keep their own businesses fully functional amid stay home orders. We also created and launched a new short-term offer specifically for small teams dealing with remote work.

Our strong balance sheet exiting winter 2020 was a good starting point. We worked from there using the above principles to preserve maximum flexibility while general economic conditions unfold over the next few months. Thanks as always to iiM’s early financial backing and the part it has played in our journey.

                       Jerrod Westfahl, AgriSync Co-Founder and CFO 

Venture Investing Terminology

There are many terms in the venture capital world that can be confusing. As we look at various companies and meet with their founders, you may hear us use some of this terminology. Here are a few such terms and what they mean.

 

Capped Note – Places a cap on the value of the company at which an investor’s debt converts to equity - ie: a $500,000 investment translates to a 10% stake in a company with a cap of $5 million. 

  

MVP – A minimum viable product (MVP) is a concept from the Lean Startup that stresses the impact of learning in new product development. Author Eric Ries defined an MVP as that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort

   

Party Round – A round of financing where generally a small amount of money is raised from a large number of investors (commonly between 10 and 20).

  

Product-Market FIt – Product-market fit, is the degree to which a product satisfies a strong market demand. Product-market fit has been identified as a first step to building a successful venture in which the company meets early adopters, gathers feedback and gauges interest in its product(s).

  

Run Rate – Run rate (also called annual run rate or sales run rate) is a method of forecasting upcoming earnings over a longer time period (usually one year) based on past earnings data. For example, if your business reported $15,000 in sales in the last quarter, your annual run rate would be $60,000

How Angel Investors Survive the COVID-19 Economic Crisis 
By: Dan Rosen, Alliance of Angels

After publishing my companion piece, “How Startups Survive the COVID-19 Economic Crisis,” I have received a number of comments about how this impacts angels and angel investing. Here are my thoughts. 

Unlike VCs, who have a fund to invest and collect a management fee for investing their fund, Angel Investors invest their own money and are under no pressure to invest in any company or at any time. Our decisions to support a startup are totally our own. As in previous market downturns, there will be some themes that help us through our investment decisions during the COVID-19 pandemic and the resulting economic crisis.

Angels have limited funds. And many of us already have extensive portfolios. We quickly will be (or already are) in the position of getting funding requests from many of our portfolio companies for new rounds of funding. Some will make it, and some won’t – even great companies with fabulous ideas will fail when the cash dries up, and sometimes Angels alone can’t provide sufficient cash to carry them through.

For Angels, this is a good time for both investing and tough love. Great companies are often started in market downturns. I believe this is because only the most dedicated entrepreneurs (the ones that feel absolutely compelled to create their new company) will leave a stable, good-paying job in the middle of a downturn.

 

My friend and colleague, John Huston of Ohio TechAngels, commented on the last two recessions: “One strong recollection I have of those periods is that CEOs (with a strong BOD) who most effectively & frequently communicated their parsimonious plans to use the emergency funding were helped and survived.” An inexperienced entrepreneur might neither have the experience nor the tools to manage their impending company crisis; we as knowledgeable Angels and mentors and board members can draw on the experiences we have faced as investors in those previous cycles. It is our hour to shine and help our startups survive and thrive!

Here are my rules for Angels during this downturn:

• Stay in the Game. I know that our public equity portfolio is way down, but, most likely, you aren’t bailing out while the stock market is down. Same is true of Angel investing. Stay in the game. Keep reviewing companies, meeting with entrepreneurs, etc. And be prepared to invest in both some of your existing companies and some new ones.
• Be highly selective. Most Angel investors are always selective, but this is the time to turn your filter even higher. Funding is even more limited than it was a few weeks ago. There will be lots of great opportunities, both in your existing portfolio and new ones. So, take your time and invest with care. The funding requests will vastly exceed your ability to invest!
• Work in a group or a team. Angel groups (or groups of Angels) can help a lot, both in terms of assessing deals and in making sure that there is a sufficient pool of capital and expertise to help companies succeed and thrive. In stressful times like these, this is even more important. The Alliance of Angels has survived the 2000 (dot com crash) and 2008 (mortgage crisis) downturns, with a group IRR of over 20%. Angels and the startups they support can really benefit from that institutional wisdom.
• Be ruthless. All Angels investors have their favorite companies. We want them to succeed. This is the time to step back and realistically consider the probability of success with limited financing. Advise your existing companies to conserve cash and focus on how to help their customers. (See my companion piece.) You may think you are helping by keeping a portfolio company alive, but make sure that their plan is reasonable to actually survive – tough love. Some of your portfolio companies will not survive – even great companies will die from running out of cash and runway. But it is likely that some good ones will come through this crisis even stronger and give a better return than you expected.
• Multiple financing rounds. This is a time to avoid companies whose plans require multiple rounds of financing with large cash needs before they can turn cash-flow positive. I’m not saying to sub-optimize the outcome of great companies. But for at least quite a while, it is likely that cash will be tight, and it will be difficult to raise money. Companies that are frugal and can make the most out of the Angel cash have a much higher probability of giving you a return.
• Deal terms matter. This is a time for resets. Both Angels and entrepreneurs need to reset expectations. The world will recover, but it is likely to take a while, so make sure that the terms on which you invest are in synch with the market and the projected future. Resetting valuations to match today’s reality is a must. If you agree to too high a valuation, the company will have trouble both attracting enough investment now and, particularly, more investment at the high post-money valuation later. Watch for other terms, like liquidation preferences, that can lower your return. And, for a less experienced CEO, do not be afraid to have some protective provisions, e.g., the company can’t exceed its budget without the approval of the investors or investors’ rep.
• Be careful, but not greedy. As Angel investors, we invest for the future and to give back. It is OK to be careful, ensuring that the return you get is commensurate with the now higher risk you are taking. But don’t be greedy and ask for large multiple liquidation preferences, too much of the company, or asking the entrepreneur to throw all their energy into the company without retaining a big enough stake. This is a time when we want a “rising tide to raise all ships.” We are in this together.
• Exits. In the short term, not many exits are likely to occur. Unlike VCs, Angels can do well with modest exit valuations (provided that the initial valuation was in line with reality). Entrepreneurs can also do well with a modest exit. Make sure the entrepreneurs in which you invest are on the same page – look for early exits, even if they are more modest. You want entrepreneurs who want to be rich, rather than becoming a king!

We are in a challenging period.  It is natural to want to pull back.  As an Angel investor, this can be a good time to both maximize your current portfolio and find some new fantastic deals with fantastic teams at reasonable terms.

The Extreme Tech Challenge is aimed to discover and support, “new technologies and innovations to solve the world’s most extreme problems. Drawing from the United Nations’ 17 Sustainable Development Goals, XTC® partners will encourage the world’s most promising entrepreneurs to develop solutions to the greatest challenges facing humankind. The XTC® is hosted by the Samsung Catalyst Fund and is supported by Cisco, Ford Motor Company, Silicon Valley Bank, Zoom, Cadence, and several other organizations.

On June 5, 2020, XTC® announced that Green Dot was one of the 52 global finalists – representing 19 countries and 6 continents – who are invited to participate in the next phase of the competition. This includes a virtual XTC Bootcamp this month and the opportunity to qualify for the Global Finals on July 15, 2020.

We are proud to support Green Dot and wish them the best of luck as they compete at this premiere event.

View the press release here: 2020 Global Finalists Announced

                                         www.greendotbioplastics.com