Navigating Our New Normal: Eclipse’s Capital Management Playbook
Mar 16, 2023|
Introducing the Eclipse Capital Management Playbook to help guide companies through the myriad of economic changes that have occurred lately and provide a helpful framework for the core principles of: Capital Preservation, Capital Protection, and Capital Creation.
On a good day or in this case, a good market, the collapse of Silicon Valley Bank (SVB) would still be a major wakeup call for both investors and founders. Important questions would need to be asked, such as where is our capital sitting? Who has it? Is the capital safe? And, can we access it? But, when we look at the collapse of SVB within the backdrop of the current economic environment, it raises an entirely new set of questions and need for focus. While brutal, we are learning three very important lessons:
1. The revaluation of the public markets, rising interest rates, and the tightening of private capital have shown us the importance of capital preservation.
2. The recent collapse of SVB (and Signature Bank) is teaching us the importance of capital protection and financial risk management.
3. When combined, the tech sector has lost (easy) access to its primary sources of public and private equity financing and now it has lost its primary source of debt financing. This leads to the third lesson: now more than ever companies must focus on capital creation.
So what does this all mean? As a founder, it means you need to change the way you think about, prioritize, and run your business — the clock is ticking and the status quo from even a week ago will no longer work, and that “normal” was already difficult.
The impact of so many structural changes in so little time brings a lot of uncertainty, which can lead to decision-making paralysis. To help guide our portfolio companies through the important conversations that need to take place right now — both internally with their leadership teams and their boards — and to share some possible actions to take depending on the stage, complexity, and maturity of their business, we created the Eclipse Capital Management Playbook.
It’s important to note that this playbook is not prescriptive. Instead, it provides a framework for the core principles of capital preservation, capital protection, and capital creation based on best practices of large, public companies, presented through the lens of Early-Stage operations. While much of this may be obvious, the goal of this playbook is to provoke internal dialogue with company leadership and boards on what to prioritize and what needs to change. And equally important, to drive a realization that this is happening and in order to succeed, we must prepare now. Pretending this current environment will simply pass and that things will return to normal is, well, a plan for failure.
At Eclipse, we want our companies to ruthlessly challenge their priorities and today, we can all agree, there are new things to consider. Specifically, we believe that by driving a dialogue and discipline around these three core principles, founders will gain a better understanding of the internal and external levers that need attention and consideration to allow them to grow and succeed despite these negative market factors.
Specifically, the playbook gives tools and guidance regarding:
1. Capital Preservation: Preserve what you have.
Rigorously reduce spend. Do more with less. Develop processes and clarity around what is necessary and what is not. Extend the runway to your next financing as far as possible. Act now, time is not your friend.
2. Capital Protection: Protect what you have.
Diversify your banking relationships (where possible). Separate working capital accounts/assets from investment accounts/assets. Develop processes and clarity around reviewing and managing financial risks. Focus on principal protection.
3. Capital Creation: Create where you can.
Focus on your commercial and financing relationships. Drive rigorous clarity around commercial sales pipeline management. Drive stringent clarity around supply chain management. Nurture equity investment relationships. Foster new debt financing relationships.
Markets are cyclical and startups have had an extraordinary run over the last decade. In the short term, our environment has changed: sales cycles will extend, discretionary spending will contract, raising capital will be harder, and access to debt financing will become more challenging. In the long(er) term, things will continue to change. While equity markets will reopen as the economy stabilizes and new sources of debt financing will fill the void left by SVB, it is clear that the performance bar for technology startups has been raised invariably. So, take this opportunity to reevaluate everything in your organization and position your business for the future. Adopt what may seem like “large(r) company” processes now, because it is necessary and aligns with your aspirational goals. Most importantly, let this difficult time inspire focus and creativity. Lean on the people you trust and respect for advice and support.
Please reach out with any questions or to receive the Eclipse Investment Policy template outlined in the Playbook: firstname.lastname@example.org
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