Fundraising and Operations Management in a Downturn

Hey everyone, this is Greg White. I'm a partner. I'm a chief operating officer here at Sway Ventures. We're a US-based venture capital firm investing in early to mid-stage tech companies with a charter really to invest in high-performing teams that are building revolutionary technology, what we call creating the next enterprise or consumer categories.

Regarding our efforts with founders and leadership teams in general, we concentrate across four distinct areas, capital syndication, revenue generation, talent acquisition, and product and product strategies. We call this Sway's value add. Hey, it's great to have Darren Kamuro with me today. Darren is a recent addition to our partner ranks here at Sway Ventures, and he's focused within our supply chain team, but he's got a very broad set of experiences.

So we're really excited to have him. Darren, great to have you today. Tell us a little bit about your background. Hey, Greg.

Yeah, thanks for having me. I'm super excited to be here today. I guess my background, I'm really a serial entrepreneur at heart. So my very first company, I started when I was attending the University of Hawaii.

I'm originally from Hawaii. From my college dorm room, I began doing energy efficiency consulting. And that business, you know, with Hawaii's high energy costs went really fast. We began growing from a small, you know, one person organization, kind of using my surfboard as a desk, all the way to expanding across the United States, offices in Seattle, Chicago, New York City, Houston, over 300 employees, $50 million in revenue in just a few years.

And that was an exciting business because we were providing energy efficiency, energy consulting for these very large organizations like Nike, Walmart, and whatnot back in the 90s. I ended up selling that company and went into a solar panel manufacturing, basically. I wanted to create clean energy. And in doing so, created a company that became one of the largest solar project developers around the world.

We had projects being developed in places like India, Spain, the Middle East, 70 different countries, and manufacturing in many of them as well. And we began building these really, really big solar farms. That company, we prepared for an S1, took it public, got it bought by private equity, and then went to work for a larger publicly traded company as chief strategy officer, which was not my favorite stop. I think I'm a bit more suited for the startup world and growth as opposed to, you know, a $10 billion kind of publicly traded organization.

So at that point, I decided to become a VC. And I always thought that one of the coolest things about being an entrepreneur was working for VCs. And I always thought that the VCs were at the top of the heap until I became one. And then I realized you have bosses as a VC called limited partners, and they're oftentimes harsher and more demanding than sometimes the VCs are.

But in that process, I raised a fund. And then we raised a second fund, raised about $150 million invested in 24 technology companies. And one of them was a IT technology company that was a government technology. And my thesis was spin them out and make them a product used by the enterprise.

And initially, we failed, frankly. The thesis didn't work because the idea of taking a government technology and putting it into large corporations is probably a little easier than it is in reality, frankly. So it required a lot of work. We had to reboot the company.

I actually had to become operational, went in, retuned the business plan, recapitalized it, and then we finally got it moving forward. But when we did, we optimized it and it went extremely fast. And that business basically went from zero to 50 million and continues to grow even today. So, you know, that's kind of my background in short, Greg.

No, it's excellent. And I think, you know, we've known you a long time and, you know, we've known you a while. And you bring frankly let me add a little of this you know three decades of startup experience in reality And you bring that to Sway Ventures which as I mentioned we thrilled to have you here I argue frankly that you an expert in capital formation kind of rapid company scale and you know, as well as kind of product led growth and exits, I think, really practically, because, you know, you recently led Palo Alto based live action, which was one of Sway Ventures first portfolio investments, and you were its president and CEO, from pre revenue on through to investments from the likes of Insight Partners and Cisco Systems and others.

And then, of course, you're talking about your time in BC, where you were a general partner in Enerdine Ventures and an early-stage investment firm focused on energy IT, where you led investments in 24 companies. So I think there's a tremendous amount of capability here. And again, Sway prides itself on having operators as much as it is investors in our organization. You certainly fit both those categories.

One of the things we talked about and the reason to have this call today really is what's going on in the world. So this idea of fundraising strategies and a downturn, it's big, it's on everyone's minds. It's near and dear to every founder we speak with. You said something to me recently that just completely resonated that 24 months of cash is the new 12 months.

And I think that's just so right. So when we think about these couple things, talk to us a bit about operational efficiencies and planning. Now, not even in a downturn, but just in general, what you should be doing with now with this overlay of a downturn looming, and we're clearly in the teeth of it. How do you think about that?

And just give our listeners some advice there. Yeah, absolutely. I mean, I think as it relates to the new normal, which were, you know, obviously coming out of a very insane period of super easy to acquire, you know, funding in a short period of time, in some cases, without even having a legitimate business plan or really built out financial models, it was more just, you know, a concept in some cases, right? And you could get a term sheet in days, in some cases, even hours at a pre-money valuation 20 times forward revenue, not even real, you know, revenue or even trailing revenue for revenue.

Those days are gone, right? And everyone's talking about that. But what What ultimately happens is that I think the cohort, if you will, of entrepreneurs and founders now that haven't seen what happened in the past or in the financial crisis and before may not know what that normal was like. And I can share some of those perspectives, but I can also give some tips on what I think you can do now to prepare.

So I think the point about 12 months cash becoming, that's a thing of the past. Now it's 24 months cash, maybe even more. And the point is, you know, you're going to have to survive what could come, you know, without really knowing, right? The uncertainty by itself is very challenging.

And these are very early stage companies, oftentimes, you know, very, very pre-rev, you know, small teams. So where do you look to cut? Unknown, right? It's tough, you know, when you, you know, maybe working out of a Regis or WeWork and you have five people on the team or whatever the case may be.

So these are tough things to have to deal with as a very early stage company. I guess maybe a couple comments I would make is one, what I've learned over my career is you need to have those tough conversations very early. And the reason why very early matters is because it's not necessarily real yet. and and when it's not real yet I think you can have the conversation with a little bit less anxiety than you would when it is real so in other words I think the brainstorming exercises that you can do now but all right let's take the employee list and let's figure out maybe even rank them on you know the contributions the individual can bring to the company or is bringing to the company and what we need for the future and if we ever had to cut you know you know who would be the first to go.

Maybe it's last in first out. And maybe it's based on, you know, I don't know, engagement or something like that. I would also add, you need to do that with your leadership team. And in some cases, your co-founder, maybe it's a couple managers, maybe it's your ELT, depending on the size of company, but have these brainstorming sessions now, when again, it's not necessarily required yet And have them across the board not just employees but it other things like hey do we even need these many you know mobile hotspots or you know yeah we buying these laptops, but, you know, maybe could we kind of ramp them back in its specification or do we need as much VMs running in AWS?

Everything matters. Even the littlest thing, you know, like things like cell phones and whatnot. I would go and spend the time now half a day or whatever the case maybe and just go through everything and you shouldn't have a lot it's pretty early but just you know identify them and have the discussion do we really need this now or not and if you don't you know maybe put it out there highlight it and and in three months or six months you know when you really need to think about how do you execute you have that list you've had had the conversations but also what you're going to find is especially if you have board directors or advisors having done this now demonstrates to them your capability your your professionalism your ability to kind of think ahead of the curve.

So when they ask you, you know, what are you guys doing from a planning perspective, you can say, we've had the meetings, we've gone through the process, we've got the list, we know what we would do, you know, and perhaps one more comment on this is, I would also try to model three scenarios, you know, one, your business normal case, you know, one, a quick recovery case, and one, you know, all things go south case. And in that, you'll also be able to play with your things like your available runway and other things and figure out what cuts need to be made based on those different scenarios.

Well, I think the point about advisors, board members is really, really astute because they're going to ask. And if they aren't asking, that's also telling. So I think that's exactly right. And there's a lot to unpack in what you're saying.

But suffice it to say, I think preparing for what could happen isn't inevitable, but what could happen is really the message. And I like your idea about three scenarios, kind of a normal and what could happen kind of in a mid-level kind of scenario and then a catastrophic scenario. And having all those three things figured out now is really prudent. Hey, the other thing that I think makes a ton of sense is that, look, let's just say you're not lucky enough to have 24 months of cash at this point in time and you're in a fundraising cycle.

So it's not complete gloom and doom out there. There's a lot of interesting advice. But raising money in a downturn, Darren, you've done this before. You've got some background here.

I like what you talk about as it relates to the archetypes that you're pursuing from an LP perspective. Talk about that a little bit. Strategics, net new VCs, your existing investors, and give our listeners a bit of that thought process. Yeah, absolutely.

So especially now raising in this uncertainty, you know, a lot of funds raise a lot of money, which is great. I think a lot of funds will be slowing down on their activity. But what you may have also seen is the rise of what we call corporate venture capital or strategic investors. These are corporations that in the past may have done things like incubators or labs, but now they're actually doing direct equity investments in companies.

And there's so much more of that now. So I would say, you know, when you're thinking about raising capital, especially now, you're probably going to want to think about a lead, you know, venture capital financial type investor. But then also maybe circle that, you know, syndicate that with some some CVC, some strategic investors as well. And I have some thoughts on what you might want to consider in doing that.

But I would also comment, though, when you're looking at those VCs, the deals are going to get tougher. They're going to be, whereas, as I mentioned earlier, in the past, it was based on great meetings and move fast. It's going to be a lot more due diligence now. It's going to take a lot more time.

During the COVID period, we didn't have as many on-site meetings. A lot of it was done via Zoom. And, you know, I envision a scenario moving back to where VCs are going to want to spend a lot more tearing companies apart, really trying to understand what makes them work. You understand the background of the founders, understand the technology and the differentiation, you know, the moat, if you will.

All of that stuff that maybe in the past you could have gotten away with, you know, maybe with a couple of blurbs, but, you know, maybe not more than that. You're going to have to actually kind of build all that out now. So I would say you know spend the time now if you thinking about raising in six months because you going to have to have a much much more defensible story You know the one thing you said that in recent conversations around this very topic is you know be flexible as a founder be willing to think aggressively and differently about your financing And it might mean if you were running out to do some type of priced round, perhaps you consider some type of bridge vehicle.

and just being much more flexible, much more aggressive on that and not thinking that all will just end well. So I think it's having that plan B, plan C, right? The other thing you mentioned that I thought was really interesting was if you have a CBC, one of these corporates or strategics leaning in and they're really leaning in, yet they don't price and lead, they're waiting for someone else. You mentioned a strategy that I thought was excellent.

Would you talk about that a little bit when you have that opportunity? Yeah, I think from a CBC standpoint, the rules are changing there as well. In the past, it used to be must have business unit sponsorship, must have VP sign off, you know, you must have proven use cases. And as the CVCs are rising, it's become a little bit more of a venture approach.

So it would be great to have those alignments. And don't get me wrong, you should still try to get those in place, but they take a while. So understand, you know, who is investing, you know, in a thematic area that might be appropriate to yours. And of those investors, you know, who's doing well, you know, energy companies right now are doing really well.

If you're an oil company, you know, times are very good as compared to maybe, you know, five years ago, for example. So, you know, if you can align your use cases to something that or some sector that is having success, even in light of the downturn, that probably plays in your advantage. I think also, you know, there are some things that I would just point out as tips when you think about working with strategics that you need to think about differently than working with a VC.

So some things are similar, right? You know, what is your investment process like? How many investment committees do you have? Who's on the committee?

Does it require people from the business? You know, for example, product management. Does it require sign-off from people in treasury, risk, finance? And understanding that right up front is going to be very telling for you because as an entrepreneur, I can tell you from my personal experience, you know, a lot of times you want to just hear what you want to hear, But it's really asking those questions and understanding the requirements from the other side that's going to make a big difference.

You know, understanding what earnings are, for example, and, you know, and your close date and trying to avoid timing your close date with their earnings. It's probably, no, if you're doing great, you know, in the energy sector, for example, maybe that's a good thing. But in general, it's probably not a good thing because, you know, they're going to be more focused on other priorities. Are there restructurings happening within the organization, especially in light of the downturn that's, you know, hitting some of these publicly traded companies right now?

You know, and does that impact you? You know, I think those are all points that you should consider. And, you know, we at Sway talk about this a lot. I think we have a lot of best practices that can follow up with anybody who's interested and really take you through some of them if you're interested as well.

Well, the one thing that I know you mentioned to one of our founders recently, I thought was spot on, was you have a CBC, a strategic leaning in. They're saying all the right things. They've checked the boxes you've just described. And you don't get anything if you don't ask.

So go ask for that letter of intent, which I thought was great. And that helps potentially drive a venture type asset manager that's maybe on the fence. and you're looking for that someone to come in and price and lead. So I really like that advice.

I think the other advice I think founders will appreciate is just, you know, have a plan B, plan C on this financing and just think about, you know, maybe it's just go secure a certain amount of cash that then can get you to, you know, a priced round later. But so these are all the things that I think you've been really clear on, Darren, and I think excellent, excellent advice. Hey, I want to thank you for today. We're super fortunate to have you at Sway Ventures on our team as a partner.

If founders or execs or anyone listening want to get in touch with you, how should they do that? Yeah, I'm accessible through the Sway email. So I'm Darren at SwayVC.com.

Also on LinkedIn, if you just look up Darren Kimura, I'm out there. And if you send me a connect, I'm happy to accept that and engage there as well. Awesome, man. Thanks a lot, Darren.

We'll speak again soon. Thanks, Greg. Take care.