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At the very onset of the pandemic, one Silicon Valley VC firm began triaging its startups. Here's how Bullpen Capital decided which companies to help and which were beyond saving.

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  • Duncan Davidson and his colleagues at Bullpen Capital recognized early on that the coronavirus outbreak could cause major business disruptions for their venture firm's startups.
  • Bullpen has gone through several rounds of analyzing the health of its startups' operations and the  way it was earmarking reserve cash to support them. In an interview with Business Insider, Davidson discussed the process the firm went through.
  • The VC firm tried to figure out which companies would be OK, which were going to need help, and which of those were worth saving.
  • Another question Davidson and his colleagues also pondered: Which companies should apply for the special small business loans the federal government set up to help firms weather the crisis? More than 30 of Bullpen's portfolio companies ended up applying.
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For Duncan Davidson, the last six weeks or so have been intense.
Since the end of February, when general partner Davidson and his colleagues at Bullpen Capital first started to think that the coronavirus epidemic could have a big effect on their funds and investments, they've been working long hours trying to help their portfolio companies figure out how to weather the coronavirus crisis. They also considered how their early-stage, post-seed venture firm itself could make the best use of the remaining cash in its four funds. That process has involved multiple rounds of analysis, to examine how the firm had earmarked its cash, as well as the changing condition of its stable of about 60 startups.
They've finally nearing the end of the effort, but it hasn't been easy.
"From the beginning of March all the way to now, this is all we've been doing," Davidson told Business Insider in an interview Tuesday. He continued: "I think most every VC fund's been working their asses off the last six weeks on a similar type of process."
Bullpen started the effort with an analysis of its reserves. Venture firms typically set aside a large portion of money in their funds for follow-on investments in their portfolio companies. Those reserve funds can be used to increase or maintain the firm's stake in companies when they raise new rounds of capital — offensive reserves, as Davidson put it. Or they can be used to help prop up companies that are going through rough times — what Davidson calls a defensive use of reserve cash.

Bullpen went through a process of triage with its startups

Even in ordinary times, venture firms routinely reassess how they plan to allocate their reserves. But when Davidson and his colleagues started to think that the epidemic could lead to a widespread economic crisis, the task of reevaluating their reserves took on a new urgency. They wanted to make sure they were clear in their minds how much cash they still had on hand and what they were conserving it for.
Bullpen Capital general partner Duncan DavidsonBullpen quickly moved from its analysis of its reserves to a kind of triage process with its portfolio companies, assessing which ones were fine, which ones were going to need help, and which ones were beyond saving. As part of that evaluation, Davidson and his team looked hard at the companies that were going to need help, to calculate how much of the firm's reserves they'd have to dedicate to their survival. The team wanted to help their portfolio companies get through the crisis, but not at the price of sacrificing opportunities to grab bigger stakes in their winners, he said.
"You don't want to use up your money on that," Davidson said. "You get in trouble if you keep on doing that."
After going through the triage analysis, Bullpen asked its startups to put together what it calls a default-alive plan. That's essentially a strategy to get the company to a point where it has enough cash to last 18 months, or until it gets to break-even, whichever comes first. Unfortunately, many of Bullpen's companies didn't take the endeavor very seriously, Davidson said. Given the Bullpen team's fears about the looming impact of the pandemic on the global economy, they found the startups' plans far too optimistic.
So, Bullpen stress-tested the startup's plans. They urged the companies to assume that the second quarter would be really bad; that, say, they might see a 50% drop in sales. Their next question for the startups: Can you really survive for the duration on your default-alive plans? That exercise forced at least some of the portfolio companies to adopt what Davidson calls the lifeboat theory — to stay afloat, you throw overboard everything except what you absolutely need.
There were some unexpected outcomes from that exercise. Some companies that Davidson and his colleagues had considered beyond hope of saving were able to find ways to give themselves new life. Some of them, like liquor delivery company Saucey, even benefitted from the crisis, seeing a surge in sales.
"We had some upside surprises," Davidson said.
But the firm also determined that a handful of startups weren't going to make it through the crisis and weren't worth putting more money or effort into, he said. He declined to name any.
"It was a very small number," Davidson said.  "I guess we were lucky that way."

Davidson worried about the "morals" of startups applying for loans

About the time when Bullpen was stress-testing its startups, the federal government enacted the CARES Act, the $2 trillion coronavirus stimulus package. That law included a $350 billion loan program for small businesses that included the promise of loan forgiveness if companies used the money to cover their payroll, utilities, and mortgages or rent. Although many startups would appear to qualify, because they have fewer than 500 employees, there was some uncertainty about whether certain regulations would bar them from participating in the program.
Davidson and his colleagues spent the next couple of weeks trying to figure out whether their startups would be able to apply. Then, once they determined the companies largely could, they considered whether they should. The team addressed that question with another round of analysis, sorting their companies into various categories.
Some were too big or didn't qualify for other reasons. Some were going to be fine without the the loans. Some weren't going to make it even if they got the stimulus funds. But some stood to benefit from them.
Bullpen wanted to make sure companies thought long and hard about whether to apply for the funds, Davidson said. Davidson emailed the firm's founders, urging them to think about the ethical issues involved. Because of the limited amount of money in the program, it was likely that the startups that scored  loans would be getting them at the expense of other companies that might have needed them more.
"Consider the impact of what you're doing," Davidson said he told the founders in the emails. "This is not just a money decision, it's a moral decision."
In the end, more than half of the 60 companies in Bullpen's portfolio applied for the small business loans. At least some of them plan to use the money to rehire people they laid off in an effort to survive the crisis, Davidson said.
"I like those companies," he said. "That's exactly the spirit of what the ... program is all about."
Got a tip about a startup or the venture industry? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
SEE ALSO: SoftBank is backing out of its plan to buy $3 billion worth of WeWork shares, including nearly $1 billion from former CEO Adam Neumann
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