Scott Orn can look back at it more calmly now, but the onset of the COVID-19 pandemic last spring created as high-pressure an environment as any other he can remember.
“We joke that the two weeks in March and April of 2020, those two to four weeks, were the worst weeks of my career,” said Orn, who is COO of San Francisco-based Kruze Consulting. “And that’s saying something, over the days in 1999,” when he was an investment banker in the middle of the dot-com bubble and its attendant IPO frenzy.
In March 2020, the coronavirus created its own frenzy, with companies scrambling to assess their sustainability amid the crisis and make urgent decisions to ensure survival. One of the most important was whether to apply for Paycheck Protection Program loans, and Orn recalled the pressure to advise the firm’s client base of startup companies on their options.
On top of the uncertainty of the pandemic, constantly mutating government guidance made assessing and applying for PPP a formidable undertaking. “It was brutal because … the government said the money will not last. So there was a gold rush to get there first, people losing their minds,” Orn recalled. “The poor bankers and us, we didn’t really know. The government was releasing new procedures and processes everyday, almost. We took heat, and banks really took some heat. The two dominant banks for startups didn’t have an SBA lending operation up and running, and all startups bank with them …. But at the last minute they were up and running. The investors’ volume of questions, the changing guidance — it was insane.”
The firm’s 85-member accounting team scrambled to advise their more than 300 clients — companies with funding at the seed, Series A, Series B and Series C stages across various industries, many in the technology space — on whether a PPP loan would be their best option.
A year later, Kruze Consulting, led by vice president of financial planning and analysis Healy Jones (who worked alonside Orn in investment banking in the 1990s), is digging through the financial data of its clients — both those that opted into the PPP and those that didn’t — to offer insight about the agility of startup companies and how Kruze can better serve them going forward.
“Remember what was going on when COVID was going on — clients and companies were struggling, panicking,” said Jones. “We found out that a certain subset of companies had a pretty good, even a really good year last year. Some of the top companies we work with in terms of revenue, their growth had a little slowdown as COVID was hitting. Then [revenue] marched up and to the right every month. There was a big swath of venture-backed startups not particularly impacted by COVID at all, and those companies did not opt for PPP loans.”
While only 20% of Kruze’s clients applied for and were granted PPP, the loans proved a crucial lifeline. On average, those companies experienced a prolonged revenue trough through July and August, before experiencing a spiking revenue recovery in November, and then growing revenues 50% by the end of the year.
“No one knew how long [COVID recovery] would take,” Orn explained. “We were calling every one of our clients, checking in, making sure they had two to three years of cash, if they needed money. It was all happening in a 10-day period. There was a ton of pressure on founders to rationalize their workforce, or extend their runway, and the great unknown. That’s where PPP was very valuable. I think this program really worked. There was a massive incentive for companies not to fire people because they were getting two and a half months of payroll — it bought everyone two and a half months. It reduced uncertainty, and two and a half months later, they were actually positioned really well.”
To PPP or not to PPP
Overall, 60 of Kruze’s clients took PPP loans totalling just over $13 million, with an average loan size of $230,000 and a median loan size of $113,000. When Kruze drilled down into the top-performing non-PPP startups, the data revealed that they had relatively consistent growth during the year, with their monthly revenue about six times higher at the end of 2020 versus the beginning of the year.
Orn explained the self-selection bias of these statistics, as companies in earlier stages of fundraising were more desperate for relief, while those with ample funding were not only less needy for loans but aware of the potential bad publicity in seeking them. “A lot of venture capitalists had pressure not to take PPP,” Orn elaborated. “We were encouraging seed or Series A [companies] to do it, because they hadn’t raised $20 million yet — they couldn’t be fat and happy. But VCs were smart; they were afraid of the blowback.”
Jones agreed that funding stages helped dictate PPP applications, though he expected the portion of clients taking PPP loans to be higher than 20%.
“In retrospect, I don’t know if it was surprising — we were all panicked,” Jones said. “Comparing those that took it versus those that didn’t — those that took it had a tougher year, overall, so the self-selection was good … . Companies that decided they didn’t know if they needed PPP did a good job in making that decision, and had a good year. Those struggling, if you look at their revenue, it went down a little bit during COVID, in March, April, it went down or flat but then picked up at the end of the year. The government money helped them … . The cool thing I saw, was those that were beat-up were smart to take PPP — there was lots of rebounding.”
As the dust settles
Despite what Orn and Jones deem the “panic” of early 2020, those weeks created a very steep but helpful learning curve for the Kruze team. “The clients appreciated it, and the team learned a lot about how to execute in a tough situation,” Orn shared. “Our team messaging was that we were doing great, there were not going to be layoffs. But it was a crazy time.”
Last spring’s unpredictability was stabilized by the PPP loans a portion of Kruze’s clients received, as the firm’s data reveals. “If [companies] didn’t have that two-and-a-half month buffer, they would be forced to make decisions,” according to Orn. “Most companies would have to fire a lot more people, and it would be impossible for them to rebound. They would suddenly be trying to hire back the people they fired, or trying to hire and train new people. That two-and-a-half month pause, that breather, was incredibly valuable. ... The government did a good job with this one.”
