A word of caution for growth-stage companies
Tips for the bear market: Cut costs, understand your metrics, plan multiple scenarios & maintain a sense of urgency.
There have been many wonderful blog posts by people such as Elad Gil and Tom Loverro at IVP about the coming doomsday for companies as result of the current funding environment. I also know that many founders are deep-in-the-weeds building their companies and may not be as in tune with the latest deal flow and VC funding newsletters. Others might still be too optimistic and think that things will be easier for them. As a founder myself, I personally experienced the pain of fundraising and what happens when it doesn’t work out.
The truth is that in this environment, the very best companies will likely not have an issue fundraising, and those that DO need the money will have a very difficult time. Investors often want to double down on the companies that are doing well. This makes sense as their priority is investing in the best companies and getting the best returns for their LPs.
One other perspective that growth-stage founders should be aware of is that fund managers, especially for growth stage and opportunity funds that invest in pro-rata, are currently having a more difficult time raising capital. This means there will be far less growth stage capital available on the market.
Just today, it was announced that Rapid API, which last year was valued at $1B, cut 50% of their staff (115 people). Anthemis Group, a VC fund, laid off 28% of their staff.
So as a founder, what should you do?
Cut costs, often deeper than you imagine.
It’s been well reported that startups have conducted extensive layoffs in the past year. In many cases, these cuts might not be deep enough. Headcount is one of the main costs for running a startup, so it will be important to look at every expense and project and think about the ROI. Is this dollar helping us grow or work toward our goals?
Understand your metrics.
Evaluate your public market comps and the secondary markets so you’re aware what your ‘real’ valuation might be if you went out for funding today. SPACs have performed poorly and tech stocks are still still down significantly. Public market comps are something that growth stage investors would be using to evaluate the value of your company, among other factors.
Have frank conversations with your existing investors. What are they currently seeing in the market? What metrics do you need to be in the top 10% of deals going out for financing?
If you do decide to raise additional VC, I would recommend raising the right amount of capital at the right valuation which will increase your odds of a win-win-win scenario for founders, employees, VCs, and LPs. If you raise at 100x ARR, it might be difficult to grow into that valuation or it might make raising follow-on capital more difficult.
Have multiple scenarios planned out.
Ensure you have multiple scenarios planned out based on growth of the business. What will you do if you don’t hit your company performance milestones? What if fundraising takes longer than expected or if it’s not successful? The more you can plan ahead, the better your chance of success.
Maintain a sense of business urgency, even if you have 4-5 years of runway.
Companies that have been performing well or those that have cut costs are now in the unique position where they have 4-5 years of runway. 😮💨 Whew! However, in these cases it will be important to maintain a sense of urgency and a focus on growth or profitability for the business. What is your north star and how do you keep the whole team aligned around that?
At the end of the day, venture capital is one means for building a great business and building a great business should always be Focus #1. If you have top business metrics and a clear strategy for building a Big Business, everything else tends to take care of itself.