First to See the Light

Bouncing Back from COVID-19: How Lessons Learned from Past Public Crises May Be Applied to the Challenges of Today

Welcome to Spencer Trask Perspectives, a monthly interview series with our CEO Bill Clifford and writer John Essick. In each installment, Mr. Clifford shares his unique insights and expert opinions on topics such as business development, deal flow, C-suite management, startup culture, entrepreneurialism, and more.

We welcome your feedback, and encourage you to submit questions to for Mr. Clifford to answer in future articles.

Every economic downturn bears its own unique burdens, but one thing is common to all, businesses are forced to respond to unexpected challenges. While the disruptions we are experiencing during the COVID-19 economy may be unprecedented in many regards, there have been periods in the recent past, such as the 2000 Dot-Com Bubble bust or the 2008 Great Recession, when the outlook for businesses was just as bleak.

The survivors of these financial crises found ways to adapt and manage through the turbulence, in many cases, coming out of each crisis stronger and more agile. Applying what these leaders have learned then can help businesses deal with difficult financial circumstances today. This is especially true for startups and small businesses requiring capital investments at a time when investor funding or revenue has dried up and the usual opportunities for growth have disappeared for the unforeseeable future.

Spencer Trask CEO, Bill Clifford, offers constructive approaches based on his wide-ranging business experience that companies can take to weather the COVID-19 economic downturn, until markets reopen and the economy gets back on its feet.

John Essick: Each economic downturn has its unique and defining factors, but they also have things in common in terms of limiting opportunities for raising investment capital. Can you compare the present economic situation to earlier economic downturns, regarding the pressure that is put on organizations looking to raise startup capital or that are in early development?

Bill Clifford: To understand the current investment situation for startups/early-stage companies, it is important to take a short trip back in history to understand what the two previous financial upheavals were really all about, and how different they were in terms of their impact on venture investing in startups.

There are really very few commonalities between the Dot-Com bust of the early 2000s, the Economic Recession of 2008, and the current COVID-19 economic situation, as it affects early stage/startup companies and their need for and approach to seeking investment capital. The Dot-Com Bubble was the result of a manic inflation of the valuation of essentially any company that touted itself as an internet (i.e.: a .com) company doing business over the world-wide web. This entire industry was poorly understood at the time but was generally considered the next step in the industrial evolution and any company not fully embracing dot-com technology would be left in the dust by its competitors. New companies were being created overnight and IPOs were being fashioned on the “back of napkins” over breakfast in Palo Alto, California every day. Fortunes were being made by entrepreneurs and investment banks at a rate unheard of in financial history; much of it on the strength of flimsy business plans and fancy pitch decks. Investors flocked to these deals at valuations that were totally unjustifiable by any sound financial metrics and IPOs were stacked up 10-deep at the NASDAQ. Millionaires were made overnight, on the basis of a logo and a marketing document!

The problem was not attracting capital — the problem was that there was too much capital available, so valuations rose to ridiculous levels that were unsustainable. Once these companies were forced to produce results and investors saw real financials in the light of day, those valuations sank like a rock and the Dot-Com boom became the Dot-Com bust. Investors were cleaned out and became wary of any .com offering or startup that smelled of a marketing scam. It became harder and harder for early-stage companies to get VC money as investors became more diligent, seeking more proof sources, prototypes, customer lists, etc. before committing capital to early stage ventures.

As we moved through the early 2000s and the VC markets began to stabilize, we hit the terrible financial crisis of 2008, referred to as the Great Recession of 2008. Primarily driven by a crash in the sub-prime mortgage market, it extended far and wide and impacted a broad range of investors, including those who would normally have directed a portion of their investments into startup/early-stage equity. This Recession lasted for many years and forced many early-stage companies not only to tighten their expense budgets, but in some cases to either go out of business entirely or to seek a “white knight” acquisition partner to merge with to continue operations. Companies seeking investment capital during this period found a willing but stringent VC market, ready to invest but with rigid terms and conditions, difficult hurdles, market valuations, etc. The number of IPOs during this period hit all time market lows, and exits were limited at best. This was not a great period for startups, early-stage formation or capital investment.

The VC industry is totally different today than it was during either the Dot-Com bust of 2000 or the Great Recession of 2008. Again, to understand the marketplace, we must understand the definitions of startups/early-stage companies: there are startups and then there are STARTUPS! Normally, in all of our columns and articles we have focused on startups being companies that have just begun operations — they have a product or the prototype of a product, they may have a few employees, they need some money to either build the product or launch the product, they either ran out of friends and family money or don’t have any other sources of funding and are now turning to the venture community for funding. There is another class of startup which we have ignored, and for the purposes of this article we will continue to ignore, which is the super-sized startup. That is the spin-off of a major company that gets launched with a few hundred million in revenue and a few hundred employees but no operating track record. They go looking for venture capital money also and compete with the early-stage companies for investment capital. For our purposes, we will concentrate on early-stage startups that seek investment for development or growth capital during the COVID-19 pandemic.

First, if you were an early-stage company that sought and received funding BEFORE the COVID-19 pandemic for the purposes of building out your product line, then your timing was impeccable! You received your funding, bought yourself some time to build out your product, and while this pandemic is playing itself out, you and your team are busy making your product the best that it can possible be! Hopefully, you are meeting your milestone commitments to your VC schedule, and when the economy has reopened in a meaningful way, your product will be ready for market.

If you accepted your funding before the COVID-19 pandemic for the purposes of launching your product into the market, with a revenue business plan and financial milestones based on sales, etc., then your timing could not have been worse. I’m sure that you and your VC partners have been hard at work modifying your investment schedule to match your new revenue schedules to the new future financial forecasts.

Any investments made during the COVID-19 pandemic were made with eyes wide open on both sides, both yours and those of your Venture Partner. I’m certain that an interesting set of Terms and Conditions have found their way into all new investment agreements concerning today’s COVID-19 valuations versus post-COVID valuations, and all the contingencies weighing in on both sides. It is a truly interesting time to be both a startup and a Venture investor in the marketplace today.

JE: Difficult economic times call for some belt tightening in terms of cash outflow. Based on past experiences, is there one or more areas of operation that startups can afford to cut back on, or would you recommend across the board cuts, of say 10%, to every component of a startup’s activity?

BC: I’ve never been a proponent of across the board expense cuts. Every company knows what the mission critical issues are within the company at any one time — be they product development, marketing, filling out the salesforce, plugging some holes in finance, filling a critical need in product support, etc. Wholesale, arbitrary expense cuts are unfocused and can cut the most critical functions just when you need them most. That approach is non-strategic, ill-informed, and potentially dangerous to the entire organization and I strongly advise against it as a method of expense control. This is the time for true out of the box thinking.

If your critical success factor (the number one, most important factor that will determine the success or failure of your company) is delivering to the marketplace a sweeping new feature that will leave the competition behind and secure your company as the de facto market leader with price and sales advantages that can’t be matched, then for the next X months, everybody in the company becomes a product developer. It won’t matter that you have the had the best receptionists and the best marketing reps and the best financial analysts when you are going out of business. If they were good before, then when you’re dominating the market, maybe they will still be available for rehire, but in the meantime you have navigated your ship through difficult economic times and maybe saved both the company and the longer term careers of everyone concerned by taking a tougher, hard-nosed approach.

JE: Should startup leadership be willing to make greater concessions to investors during economic downturns, such as relinquishing more control or ceding more ownership rights?

BC: During this pandemic, entrepreneurs have no options but to meet market terms and conditions when it comes to accepting investments from the venture community. You can be assured that every venture placement done during this pandemic will be heavily weighted based on the COVID-19 market conditions, and contain contingency language that takes into consideration the impact that the pandemic has had on the company’s current financial condition and forecasted future results. Multiple forecasts will likely have been created with various post-COVID scenarios showing a variety of P/L results. If future rounds of financing are contemplated, then valuations will likely be driven by these post-COVID results — sometimes to the benefit of the company, sometimes of the benefit of the venture investor. In these times of uncertainty, the early-stage entrepreneur has no choice but to maintain maximum flexibility, understanding that his venture partner is operating in the same unknown and uncharted waters!

I am aware of two separate VC placements done during this COVID-19 pandemic. One was what you could consider a rather run-of-the mill follow-on round done in the mid-$10M range to continue to fund the growth of a middle market company in the remote distance learning market than had met or exceeded its performance hurdles. None of the terms and conditions in that deal were particularly onerous but the current valuation was market adjusted for the COVID-19 impact. The second deal was a much larger deal (in the $65M-$90M range) with multiple tranches described and the valuations at both the initial investment point and the second investment point, all COVID-19 affected with weighted averaging, helping level the playing field between the company and the Venture Capital investor.

JE: What traits have you recognized in startups that were able to weather past economic storms that you think can benefit companies today?

BC: While it is hard to pinpoint any one or two of the most successful factors that I’ve seen over many years of observing startups rise and fail, due to all kinds of financial and marketplace conditions, one of the most common traits I’ve observed in the winners was an attitude on the part of the employees of these companies to be willing to do anything and everything — from the most menial to the most difficult and challenging job in the company — without question or complaint! Everyone simply pitched in and did whatever was required at the time without regard for job descriptions or ownership or compensation, etc. Everybody just did what was needed at the time it was needed — there were no heroes or villains, everybody sold if that’s what was needed, everybody booked orders if that’s what was needed. The company worked as one large organism — maybe not with 100% efficiency but it worked, and it worked with great enthusiasm and morale. It seemed to be a great place to work and appeared to be an easy place to manage. There was little internal competitive tension and lots of internal cooperation. It seemed that when faced with the dire consequences of bankruptcy, the normal internal barriers to working together and internal competitiveness melt away and a natural harmony evolved to get these companies through their economic storms.

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About Bill Clifford
Bill Clifford is Chief Executive Officer of Spencer Trask & Co., a privately owned advanced technology incubation firm. Prior to joining Spencer Trask & Co., Mr. Clifford served as Chairman of the Board and Chief Executive Officer at Aperture Technologies Inc., General Partner of The Fields Group, and General Partner of New Vista Capital. He is also the former President and Chief Executive Officer of Gartner Group, the world’s leading authority on the information technology industry, user and vendor technology strategies and market research. During his tenure at Gartner, annual revenues increased from $175 million in fiscal 1993 to $780 million in fiscal 1999.

Mr. Clifford currently serves on the board of directors of Cybersettle Inc. and SWK Holdings (SWKH.OB). He has been featured in CEO Magazine, Leaders Magazine and Forbes, and is a keynote speaker and panelist at numerous Technology Industry conferences.

The Immune Response Corporation

Revolution in Immunotherapy

DISCOVERY – Non-infectious viral vaccines.

INNOVATOR – In the history of medicine, few figures have had as profound an impact on human health and wellbeing as Dr. Jonas Salk. His polio vaccine breakthrough was the culmination of centuries of research, dating back to Louis Pasteur discovering inoculation. However, Salk’s method was different. He found a way to protect people from viruses without giving them the very disease the vaccine was designed to prevent.

Using this no-infection method, Salk worked with Kevin Kimberlin of Spencer Trask to develop cancer vaccines and an immunotherapeutic to slow or prevent AIDS. They patented and conducted preclinical studies on a cancer vaccine that demonstrated a startling 90% protection against lethal malignancies. 

IMPACT – A fusion of dendritic cells and the cancer antigen, their technology formed the basis for the first FDA-approved cell-based immunotherapy. Over 40,000 men with metastatic castrate-resistant prostate cancer have received the treatment, and it appears especially effective for African-American men who receive a 48% improved survival benefit compared to white men.

The team and facility making this immunotherapy also made clinical and commercial supplies of the first approved gene therapy, the CAT-T drug Kymriah.

The first approved cell-base immunotherapy and gene therapy prompted the FDA Commissioner to say, “New technologies such as gene and cell therapies hold out the potential to transform medicine and create an inflection point in our ability to treat and even cure many intractable illnesses.”

The noninfectious vaccine approach developed by Jonas Salk eliminated polio from the developed countries, his flu vaccine mitigated the effects of influenza for the past 75 years, and finally, the cancer vaccine developed at his Immune Response Corporation led the way to gene, cell-based, and immune therapy innovations that will impact human health for generations. In summary, Salk released the last step in enabling the most important preventative medicine – non-infectious viral vaccination.