Q1 2020 - (released May 2020)

SA's quarterly Private Equity & Venture Capital magazine

EBITDAC

by Michael Avery

The COVID-19 pandemic has seen a new term coined for business that sums up how the world is changing. EBITDAC = Earnings Before Interest, Taxes, Depreciation, Amortisation and Coronavirus.

Catalyst spoke with a couple of doyens in the Venture Capital space – Keet van Zyl, partner and co-founder of Knife Capital and Clive Butkow, CEO of Kalon Venture Partners – to find out how they are managing their portfolio companies through the crisis, and what lessons COVID-19 has dished up so far. 

Butkow, who has been in business for 30 years, and involved in building and investing in several tech businesses, says that this is the first time he’s ever come across a black swan event that has “changed the playbook.”

If you are a high growth, innovation-led technology business looking to raise venture capital, or you have raised venture capital, the one thing that Butkow stresses one must understand is that the market has made a complete 180 degree turn, from being a seller’s market to a buyer’s market. 

“What we are finding, not just in South Africa but all over the world,” says Butkow, “is term sheets that have been submitted to entrepreneurs to invest capital in their businesses have been pulled and completely deleted. Term sheets that were going to be signed in a few weeks have now been stretched out to a few months, for the VCs to see what's really happening in the global economy.” 

“It's been tough, but we have to stay positive,” says van Zyl laconically. “Luckily, we have a diversified portfolio, so some of them are actually benefiting – the online education businesses [for example], while others are not.”

Van Zyl says that the Knife team is balancing their response between the ability to add value from a knowledge and networks perspective and the funding, which is a bit more complex. 

“The VC model is designed around equity instruments” says van Zyl. 
But the team have been forced to rethink this approach and innovate due to the extraordinary circumstances created by COVID-19.

“So we have made a portion of our capital available to our portfolio companies, which is basically an equity-type instrument with a tiered return which they can give back to us or not give back to us, so they have a call option to buy us back out or not.” 

“Effectively, what Knife is doing is saying to their portfolio companies that they’ve stress-tested, ‘here's money’; we are not expecting an IRR in the short-term because our opportunity cost of money, of putting money behind our portfolio in the foreseeable future, is not as much as it would be next year when we actually need it to invest in the next Snapplify, for example.” 

Butkow points out that a number of different issues are affecting an entrepreneur’s ability to raise capital. 

“In the venture capital space, business as usual is no more, so my advice to any entrepreneur in the tech space is, if you are a capital lite and capital efficient business, there is still a possibility of raising capital but your chances are a lot lower now than they were before,” says Butkow. 

“You have to see how much cash you have. Cash is now king, whether you're a one man show or a 50 to 100 man show, cashflow is everything. The key question is, how much runway do you have, and how many months can you survive in the worst case scenario where you've got no more revenue coming in and you have to pay salaries or place people on furlough leave; how much cash do you have to actually survive?” 

“The days of just driving topline growth at any cost are over. You have to look at how much that growth is going to cost you now. You've got to become a lot more disciplined in your approach to building a business. So what we've done with our businesses is we've asked them for a normal plan, best case plan and a worst case plan, which must be at minimum, 24 months of runway. The capital markets have dried up.” 

We all know that the world is going to look different and van Zyl reveals that they challenged their portfolio companies to provide Knife with an action plan.


“What are your immediate actions, what are you cutting? How are you preserving cash? How are you protecting your revenue streams? How are you communicating with your clients and stakeholders? What is your leadership plan.” 

Van Zyl says that he advised his portfolio companies to use this experience as an opportunity to redefine the business model and actually go onto the offence. 

“You can't save yourself into prosperity. If you are a high growth start up, you actually have to have a beyond-COVID plan that looks different to what your business plan looked like before COVID,” says van Zyl passionately. “And only when we approve that little plan, which doesn't have to be extensive, then we will make the plug-in capital available.” 

And if you haven't got that sort of capital runway, then Butkow advises aggressive cost-cutting, using his mantra, “every rand saved is easier than a rand raised”.