What to Do During a Market Crash: Secondaries Survival Tips

Written during the March 2020 market crash. The companies named reflect that moment; the principles are evergreen.

In times of upheaval, most of us operate out of instinct and fear, despite the fact that countless studies have shown this to be the worst possible response. With that in mind, here are a few tips for thinking about your pre-IPO portfolio:

ONE: DON’T PANIC

If you’ve followed proven diversification practices, and understand that pre-IPO secondaries are among the riskiest of asset classes, you shouldn’t have invested much of your total holdings in these securities. While the weeks ahead may look bleak, past calamities have eventually led to a return to normalcy.

So rather than follow your emotions or try to time the market, take stock of your holdings with a cool head and ask the hard questions that will help you decide whether to unload companies that are unlikely to recover (they probably had weak business prospects even before the current crisis), and consider increasing your holdings in those you believe have long-term healthy prospects.

TWO: FOCUS ON “SHOCK-PROOF” COMPANIES

I spent several months representing “The Black Swan” author Nassim Taleb, organizing road shows and presentations in the Middle East for him, and he taught me many invaluable lessons. It’s almost certain we’ll recover from the double-punch of Coronavirus and stock plunges, but it’s just as certain that we’ll face another equally unsettling shock in the future.

We can never predict what form these events will take (although another viral outbreak is likely to be among them), but those companies that have either prepared for or are by definition less “fragile” to systemic shocks are more likely to survive. For instance, Coursera is not only playing a major role in remote education now, many experts believe it may provide a glimpse of what remote learning, living and working will look like in the future. Zipline is currently using drones to deliver medical supplies to remote areas, but its founder has plans to deploy this service more widely (to cruise ships, for instance). Finally, Impossible Foods, JUST, and Indigo AG, are all companies that may, in the long run, benefit if the world embraces meat substitutes for reasons of health or climate change.

THREE: BE WARY OF FRAGILE COMPANIES

Novel flu strains reveal an inherent weakness in companies that rely on travel or bringing people together. WeWork and Airbnb are examples. Others may be more susceptible to drastic drops in consumer spending, whether through disaster or just an old-fashioned downturn; Casper and Peloton may survive and become profitable powerhouses, but they are also particularly prone to collapsing consumer spending, particularly on luxury items.

Some challenges (new epidemics, climate change, social unrest, job loss to technological advances) are not difficult to foresee and should factor into your decision-making. However, true “Black Swans” are by definition unpredictable and may affect different sectors in different ways. To solve this problem, diversify. If you have a company that relies on networked computer systems to function (who doesn’t?), consider adding a company that specializes in computer security and / or data recovery. If you’re over-exposed to companies in industries that could become highly regulated (genetics, surveillance, carbon-belching), consider adding those which are unlikely to incur or suffer from intense government oversight.

FOUR: WATCH THE LEADERSHIP & THE CUSTOMERS

One way to determine the resiliency of a company is to watch management response and consumer reaction during the current crisis. Did they have an emergency plan in place and are they rolling it out? Do they speak honestly about the situation with their stakeholders? Are they responding in ways to mitigate losses and return to solid footing once the storm passes?

While private companies are difficult to analyze on this front, there are several ways to gain insight into the leadership and company culture surrounding crisis management. Check their social media presence — are they ignoring the situation or providing sound guidance? Look at their customers: do they seem equally excited about their products or services or are they jumping ship? News reports, social media, and plain old-fashioned tire-kicking can provide insight.

As part of your research, you can always reach out to professionals for insights and help making decisions (I’m happy to provide any assistance — just shoot me an email cgracia@rainmakersecurities.com).

FIVE: THINK LONG TERM

This too shall pass. And now is the time to prepare for the next chapter in our global economic cycle.

Meanwhile, be prepared to wait longer for exits. Many unicorns are likely to postpone their IPOs until the market settles down, but if you are a long-term investor (as almost all of us should be), waiting another year or so shouldn’t affect your portfolio. According to Inc magazine, Airbnb, Asana, Gitlab, Casper, DoorDash, Instacart, Lemonade, Postmates, Robinhood, and UiPath have all hinted at or announced 2020 IPOs. It’s possible many of these will be postponed, depending on market conditions. The good news is that this longer timetable provides an opportunity to more thoroughly analyze and acquire shares in companies you believe in before they go public.

Despite temptations, you may want to hold onto shares that may have seen a drop in price. But if a company has strong fundamentals, the longer term investor is likely to win out over short term speculation. On the other hand, if you’ve lost faith in a company because of this crisis, ask yourself whether the crisis merely accelerated an inevitable reckoning. If that’s the case, you may want to part with those shares.

Alternatively, if you have private companies on your “wish list,” now may be a time for accredited investors to pick them up at discounts to where they were trading just a few weeks ago.

Good luck and good health to everyone as we face this global challenge together. And if you are ever seeking advice or transactions on the pre-IPO market, Rainmaker Securities is well-positioned and happy to help with free research reports, pricing, transactions and more.