Extend your cash trail. Do more with less. And prepare for the end of boom times.
These are common threads embedded in the warning notes that venture capitalists send to their portfolio companies in an uncertain macroeconomic environment and declining public markets.
With continued inflation, geopolitical strife, and other headwinds impacting businesses across industries and borders, tech companies are already beginning to lay off workers and slow hiring.
Investors are also holding back after pouring a record amount of capital into startups. Global venture capital funding in the second quarter is expected to decline 19% quarter over quarter, according to CBInsights. Startup valuations also take a hit, and analysts predict “down rounds” – when companies land new rounds of funding at lower valuations than their last raise.
Here is a sampling of what venture capitalists are advising:
Andreessen Horowitz: “Reevaluate your valuation, understand your consumption multiples and develop scenario plans.” – via the a16z blog.
Y combiner: “If your plan is to raise funds over the next 6-12 months, you may be doing so at the height of the recession. Remember that your chances of success are extremely low even if your business is doing well We recommend changing your plan — via TechCrunch Related: Save your startup during an economic downturn
Capital Sequoia: “We don’t think this is going to be another steep correction followed by an equally rapid V-shaped recovery as we saw at the start of the pandemic… The era of reward for hypergrowth at all costs is quickly coming to an end. ” via The Information.
Lightspeed Venture Partners: “Many CEOs will make painful decisions in order to keep their business afloat in choppy waters. Some will have to deal with compromises that only a few months ago would have seemed far-fetched or unnecessary. We see a silver lining, however, when tough decisions come up. – via the Lightspeed Blog.
We also caught up with Jason Stoffer, a partner at Seattle-based Maveron, which just raised $225 million. Here’s what Maveron is saying to portfolio companies right now, according to Stoffer, who shared the following with GeekWire via email:
- The pre-IPO funding market is largely closed at the moment.
- Even the best private companies raise funding rounds if they need capital. This is largely due to two factors: (1) the ability for anyone with growth capital to invest to buy public names at dramatically reduced valuations and (2) the fact that there is a deep uncertainty about how to price private assets.
- The last few years have led to excesses. When you can raise almost unlimited capital at very high valuations, you tend to spend it. Consequently, CEOs had no choice and a lack of prioritization led to neglect. Companies have embarked on too many projects, rather than fewer well-executed projects. Companies hired too many employees, when you could have done more with less. An excess of venture capital-funded competition has led to economic competition in areas ranging from carpooling to food delivery to consumer goods. Some founders never learned that ultimately companies must have a strong underlying economy and be self-sufficient.
- Since the fall, when the first signs of macroeconomic instability appeared, we have been urging portfolio companies to act. Increase capital or reduce expenses to get more than 24 months of cash. Prioritize and do more with less. Become a world class in capital allocation. Don’t expect a liquidity event anytime in the next few years and plan accordingly.
- Scenario plan for different futures. One is when the Fed makes a soft landing and the economy quickly returns to normal. The other extreme is many years of problems with inflation, consumer spending cuts, and geopolitical strife.