The discussion about a bubble have continued for over a year and with the early 2016 drop in worldwide stock prices and economic sentiment, many folks are weighing in on what it means to venture fundraising and how companies should react. Here is a brief summary of three recent articles on the topic.

In Dear Startup: Here’s How to Stay Alive by Heidi Roizen in her Adventures in Entrepreneurship! blog tells entrepreneurs the game has changed, tough times are here, and it’s time to hunker down and extend your runway.

 

When a market turns, we tend to see the signs earlier than the entrepreneurs working on the front lines. This market? I’d say it has turned. It is going to be hard (or impossible) for many of today’s startups to raise funds. And I think it will get worse before it gets better.

Heidi Roizen

Operating Partner, DFJ

Here is Roizen’s list of behaviors for staying alive when funding goes dark:

Stop clinging to your (or anyone else’s) valuation

  • Stop clinging to your (or anyone else’s) valuation
  • Redefine what success looks like
  • Get to cash-flow positive on the capital you already have (AKA, survive)
  • Understand whether your current investors are going to get you there
  • Stop worrying about morale
  • Cut more than you think is needed
  • Scrub your revenues
  • Focus maniacally on your metrics
  • Hunker down

Seth Levine of Foundry thinks the markets may have swung too far already, pointing to public market multiples already below historical norms as he concludes the non-Unicorn venture-backed market is not in a bubble. He predicts Series As will be harder with Series B rounds being downright difficult, but clearly separates recent venture investing with the craziness of 1999 that led to the dot-com bust.

 

…my most important business mantra:

  1. don’t panic
  2. gather information
  3. make informed decisions

As always, the order here matters a lot.

Seth Levine

Managing Director, Foundry Group

Danielle Morrill of Mattermark provides some key insights in Surviving Whatever Comes Next along with a large collection of thoughts for entrepreneurs on how to work through difficult funding times. Here are some of the highlights and be sure to check out her post for all the links to her information sources.

  • Triage Cash
  • Compare to / get to these metrics
  1. $10-12k per employee max monthly burn
  2. 150 square feet per employee, all inclusive of common areas
  3. 1 customer success / support per person per $2M in annual revenue
  4. 1 month of engineering spend trending toward < 50% monthly revenue
  • Get to break even with each of your sales reps
  • Run A Truly ‘Do or Die’ Fundraising Process
  • Increasing Optionality on Outcomes
  • Reset Your Valuation Expectations
  • Reset Your Fundraising Timeline Expectations
  • Live to See Another Day

And now for my two cents. Markets are notorious for swinging too far in both directions. However, knowing they do and knowing when they have, are two very different things. Therefore, the one thing we do know is funding will be more difficult for longer than it should.

So preserving cash with the expectation that fundraising will take twice as long and bring in half as much is a good start. Only a few will be able to achieve this without resetting valuation expectations or waiting until the investment window reopens.

The next step is to reevaluate your risks, your plans to mitigate them, and your risk mitigation milestones with a view toward less capital and longer sales cycles. Your previous assumptions about access to cash just got jolted. Make sure you make new plans accordingly.

Layoffs are Hard. Once has to be enough.

If you have to let people go, do it once and make it count. These are good people. Laying them off is hard. Cutting enough costs is really hard. But it is much harder for everyone if you have to go through a second or third round of cuts.

Think of it this way. The people you let go first have the best opportunity to find something else quickly. If the downturn is longer and deeper than you thought and you end up letting people go 9 months from now or a year and a half from now, they will have a much harder time finding something else. And these will be your best people. Do it right, so you only do it once.

Revenue is likely to slip as well. The old double whammy. Many a company has flown over the cliff due to it. Be sure to fully understand any recent changes in your customer acquisition metrics. They may have fallen significantly in 2016 as worldwide economic uncertainty skyrocketed. You don’t want to be making plans based on inaccurate customer acquisition costs or revenue growth estimates when the data is available for accurate metrics.

Then focus on cash and revenue. Cash and Revenue. I like the idea of getting every sales rep to break even. If they aren’t above breakeven, understand why and fix it now.