5 Steps to Surviving the Deep Venture Capital Freeze


Over the past few decades, the venture capital (VC) industry has gone through significant emotional swings. What should business leaders do when VCs tell them to cut costs before the next round? Read on to get advice from a CEO whose startup just raised $50 million amid the current venture capital freeze.

The roller coaster of venture capital

When the economy is growing and the initial public offering market starts to heat up, VCs are possessed by a bad case of fear of missing out (FOMO). FOMO is pushing VCs to tell their portfolio companies to spend all the money they need to grow more than 100% annually as they race for the IPO market.

Every few years, FOMO quickly turns to fear of losing everything (FOLE). This certainly happened in a big way when the dotcom bubble burst and during the financial crisis of 2008. It’s easy to see it coming in advance – it’s usually preceded by a burst of IPOs and booming NASDAQ – that’s what happened in 1999.

Last year, I expected FOMO to turn quickly to FOLE due to the rapid growth of special purpose acquisition companies (SPACs) and record levels of venture capital investment. Little did I know that the Federal Reserve’s decision to launch a campaign of interest rate hikes would trigger the emotional reversal.

Admittedly, it was more complicated than that. As the New York Times reported, [the change in VC attitudes] is due to the end of a “decade of low interest rates, the war in Ukraine [that is] causing unpredictable macroeconomic ripples; and big tech companies – like Amazon and Netflix – whose stocks are crashing,”

Venture capitalists are increasingly telling their cash-burning holding companies not to expect another check. In the first quarter, US venture capital fell 8% to $71 billion; more than 55 technology companies have announced layoffs or closures since the start of the year, compared to 25 at this time last year; and as of May 4, IPOs were down 80% from a year earlier.

The fatal risk of skipping the second stage of scaling

For startup founders, the problem can be explained by looking at the four stages of scaling I talked about in my 2019 book, Evolve your startup:

  1. Win your first customers. When a startup finds a match between customer needs and the product it is developing, it can win customers
  2. Build a scalable business model. Before taking on significant capital to grow rapidly, the startup must rethink processes – such as sales, product development, and customer service – so that the startup has a clear path to profitability as it grows. growth.
  3. Sprint to liquidity. The startup accepts significant capital that it spends on sales, marketing, and product development so it can quickly reach over $100 million in revenue, allowing it to go public.
  4. Run the marathon. The startup goes public and must maintain revenue growth above 20% for its stock price to continue to rise.

As the book was written, most startups obeyed the demands of FOMO-infused VCs to spend what was needed to grow quickly. In short, they skipped the second stage of scaling.

Now that FOLE is the emotion of the day, VCs are demanding startups take the step they previously advised them to skip. Publicly traded companies that never completed stage two — like Uber — are now trying to do so.

Lessons from a startup that just raised $50 million

San Francisco-based Mutiny, a four-year-old, 49-employee operator of a website personalization platform to help businesses increase sales, raised $50 million in April for a post-money valuation of $615 million, according to Pitchbook.

Mutiny investors wanted to invest because CEOs of their portfolio companies said Mutiny’s product helped them grow faster.

How? As co-founder and CEO Jaleh Rezaei — whose two Stanford degrees include an MBA — told me in a May 11 interview, “By customizing a company’s website based on what a potential customer search, a customer’s conversion rate increased by 60 (where 10% is huge) We cut unnecessary marketing spend from $19 out of $20 spent to $18, allowing businesses to increase revenue 50 to 100%.”

Rezaei said Mutiny has little difficulty raising capital as it passes five tests:

  • Solve a big problem
  • Aim for a big market
  • Make the customer much more efficient
  • Building a culture that attracts and helps the best people realize their potential
  • Tighten your unit’s economy – for example, complete the second scaling stage before taking large amounts of capital

Do these five things and you just might survive the VC freeze.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.


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