Brutal decisions in times of crisis: on funding, cashflow, and pivoting with Paul Jozefak
Paul Jozefak is a former successful VC and Head of SAP Ventures Europe turned founder. He’s experienced two major financial crises as a VC and armed with this experience; he navigated his startup Receeve through Covid. We’ve talked to him about the difficult but potentially life-saving financial decisions that can help your company to stay afloat, as well as predictions for the future of funding.
As Receeve is a digital debt servicing platform, it sounds like you guys could have more work to do due to the crisis.
Our first inclination around corona wasn’t that all these collections would appear immediately on the market as an opportunity for us. Yet, we’re going to come out of the whole corona thing with quite a bit of wind in our sails. Because of people who aren’t paying now, an inflow of collections for our clients will follow. At the same time, we need to keep in mind that we don’t know if markets are coming back this year for the VCs but all signs point to that. If you look at the stock market, it’s absolutely insane. It’s just completely decoupled from anything that’s reality and VC is the same to an extent.
What was your immediate reaction when Covid hit last year?
In March 2020, we had just raised our seed round: 4 million EUR. Then corona hit, and my first response was: Holy shit! I went through the crises in 2001 and 2008 as a VC, and venture markets totally dried up. It was brutal. After 2001, it took around 3-4 years for the markets to recover and for investors to have any appetite for risk.
How did the investor’s eagerness for deals change back then?
There were deals happening, but you were getting screwed as a founder. It became 100 percent a buyer’s market, and the VCs were taking advantage of it. What would have been a 30-40-50 million valuation at series A or B was suddenly being raised at 10, if not 5 million valuation. After 2008, it was 1.5 years for the appetite to come back.
Were you getting ready for a similar scenario this time around as a founder?
We just raised money, and we are in a business that is ready to boom. We were planning to raise additional money in 2021, but that may happen earlier now. We had to reshape our whole business case to adapt.
What did that look like?
At the end of the day, corona has triggered a massive adaptation of what we were planning on doing. We were cautious without being too cautious – that’s one of the biggest problems when it comes to making these quasi-brutal decisions around how you will build your business.
What were some of the first decisions you took when you realized the full extent of the situation?
We stepped on the brakes, and we had to make some decisions about people that were already given contracts that we ended up not bringing on board. It always sucks when you have to let people go or jobs don’t materialize, but we had to make that decision in the interest of the business and make sure we have enough runway/cash in the bank to make it through the next year easily. If markets don’t recover for fundraising early this year, we’re good to go for another 12 months, which was our main priority.
We prioritized making sure we have cash instead of going full force forward based on the original business case. We made a product and high-level business decision regarding cash and cash preservation. A lot of startups – whether you are successful or not, one day, you’re going to be hit with a decision of do we preserve cash or do we aggressively invest it in hopes of generating revenue and before raising the next round. One way or another, you need to make sure that money comes in the door to continue growing your business.
You have to make that decision: are we completely dead, do we just give up, or do we try to survive and earn revenues another day. Do we just kill it, or do we pivot? A lot of times, walking away, from a founder’s perspective, is better than pivoting.
What would you recommend to a small business to focus on right now?
If I have sales, and they are starting to drop, my first question would be – for how long do we expect those sales to be dropping. Is there a recovery potential in your market anytime soon, and how long do you have to live through lean times. How long before your business would hit a wall? If you need to stretch your timeline until you run out of cash and you can still continue selling to an extent, my first inclination would be to start discounting.
Get creative on your deals, and potentially try to land customers that initially weren’t interested in what you were originally trying to sell but get super creative about the contracts you are trying to close with them.
I think the whole corona thing will not be as long as many people are right now predicting. Some people are saying there will be no recovery until 2023, which I think is absolutely insane. I don’t actually believe that; I just think that some things will take longer to recover. Look at Germany; if I had my VC hat on, I would say be creative and stretch the revenues that you can generate for 6-12 months.
Which industries do you see as the most promising?
Anything that’s in any shape or form related to work from home will be profiting from this. Zoom, Slack, some weird businesses will indirectly profit. Let’s say climate change; people saw what happens when we don’t move around as much.
As for cash flow, what behavior works during a crisis based on your experience?
Get your costs down; if you have unnecessary costs, buy yourself some time, trim the fat. Founders hate to hear this: before you fire too many people, consider not giving yourself a salary. In many businesses, founders have decided not to take a 6-month salary just to keep two additional employees on board.
Costs are ultimately the most important. Any kind of change you decide, you need to think – what am I doing this for. If you genuinely believe in your business and need to raise capital or break even, you do everything to survive. You hear these war stories from startups all the time; everyone talks about a near-debt situation in their company, but then that one customer showed up, and they signed a 7-figure deal a week before they declared bankruptcy. If you had given up earlier, you wouldn’t have had that opportunity.
From my own experience, the ones who survive the longest tend to win – it seems so obvious, but those who just suck it up and make sure to survive longer than competitors tend to be the winners. There is a survivor aspect to everything. Earlybird was written off for dead at least three times, and recently, they had a huge exit – these guys have just been around long enough, and now they are reaping the rewards. They have some amazing investments in their portfolio, including UIPath, and I am flabbergasted and super happy for them.
For many companies, it is around 7-8 years to get somewhere. Nothing happens overnight; stick it out, lower your costs, focus on being creative. That being said, there is nothing wrong with giving up if there is no future; just go and do something else. Sometimes the best thing to do is to shut it down, move on with your life and do something different.
PAUL JOZEFAK was born in Slovakia, grew up in the US, and currently lives in Germany, home to his company Receeve. Before founding his startup, he led innovation at the Otto Group, was a partner at Neuhaus Partners, and managed SAP’s Corporate Venture fund in Europe. At the time, he was named one of the 20 most influential investors in Europe. Receeve is a digital collections platform with the potential to become an industry-standard in the collections industry.