If you’re a founder who is currently raising venture capital, or someone who follows the industry on social media, you’ve probably noticed an abrupt change in tone in VC. On the heels of the industry’s biggest year in history, investor expectations shifted seemingly overnight.
“An entire generation of entrepreneurs and tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run,” Bill Gurley tweeted on April 29. By May 4, David Sachs declared that “investor sentiment in Silicon Valley is the most negative since the dot-com crash.”
What’s behind the sudden change? The explanation, at least for VCs, is simple: Later-stage appetite for risky tech bets died off. Crossover investors—funds that normally trade public stocks but have deployed huge amounts of capital into VC in recent years—are now posting huge losses and retrenching back to their fields. Tech stocks took a beating in the last two weeks, effectively closing the IPO window for pre-exit companies, and making public companies look more attractive than overvalued startups by comparison.
Without late stage VC dollars, and facing bearish public markets, pre-exit startups have fewer alternatives for financing and risk running out of money. When VCs expect late stage funding to dry up, we factor that slowdown into every prior stage. Even if their coffers are full, investors will be much more cautious in their deployment. For founders, this means a slower pace, lower round sizes, and a steeper climb to close them.
I’ve noticed this in my own pipeline. I reached out to a dozen peers who invest at the earliest stages, to see if they were noticing the same. And by and large, they are. If you’re a founder, you may be starting to panic. But unless you’ve raised at “last year’s valuations,” or you’re imminently running out of money, there is little reason to do so. Read on to learn the advice that seed-stage VCs are sharing with their portfolios.
Run your business like it’s a business
The past few years have been all about blitzscaling. Now, profitable growth is the new black. “Contrary to popular belief in startup ecosystems, profitability is probably the best place most companies can be in,” says Elizabeth Yin, general partner at Hustle Fund. That’s because you don’t depend on investors to live to fight another day. Every VC I spoke with is advising companies to manage their cash aggressively, starting now. To do this, Yin recommends startups “cut unnecessary burn, and if your company doesn’t have network effects, get to profitability asap. Make this a goal.”
This doesn’t always mean you cut your growth entirely. Gale Wilkinson, managing partner at Vitalize Venture Capital, says that “founders should proceed in a balanced fashion—aim for growth while keeping an eye on capital efficiency. You need to spend money on marketing and sales even during a down cycle. However, it must be done in a prudent way.” Virginie Raphael, founder of FullCircle VC, suggests picking “a handful of use cases to show selective (but scalable) traction amongst specific customer groups. That way you can keep demonstrating product-market fit while being capital efficient.”
Most important, Jessica Peltz Zatulove, founding partner at Hannah Grey VC, stresses that founders should act with urgency. “Make necessary changes to reduce spending now,” she says. “The earlier you can course correct to stretch your runway, the more optionality you give yourself in the long run.”
Cash is king
All investors agreed that there is a premium on cash on hand, so if you see an opportunity to secure investor dollars, don’t get greedy on valuations. “If you are raising at this time, take whatever check you can get and survive this winter,” says Gayatri Sarkar, founder of growth VC fund Advaita Capital. Jessica Karr, general partner at Coyote Ventures, says founders should “take in the amount of money you need to achieve your milestones. If your valuation is too high, you do risk a down round later.”
Lolita Taub, General Partner at Ganas Ventures, reminds founders to look beyond fundraising. “The best type of funding is revenue. So, prioritize it as a source of capital.” Yin concurs: “Companies should always try to manage their cash flow, but especially during times when investor dollars are scarcer.” To improve your cash flow, you can ask customers to pre-pay or pay partially upfront. Or you can go beyond your scope to secure extra revenue. “Design and consulting projects where you own the product IP are great ways to bring in cash, make progress on your product, and ensure you’re building a product customers want.”
Nurture investor relationships
If you haven’t prioritized building trust with your investors, now is a good time to start. Investors have a broader view of the market, can be a sounding board for ideas, and can pull in outside support if you can enlist theirs. Critically, your existing investors have dollars at stake if you fail, so they may be helpful to securing additional funding. But this is hard to do if they have no idea what you’re up to. Karr says that founders should “send a monthly investor update and be honest when something doesn’t work.” Zatulove agrees: “Be transparent and lean on your investors to help you think through cost reduction strategies and scenario planning.”
If you haven’t raised capital yet, building investor relationships is even more critical. Janine Sickmeyer, General Partner at Overlooked Ventures, advises founders to “partner with early-stage investors you can trust and can help beyond a check. It will take more effort upfront but will make a huge difference in the long term.” To do this, Peltz Zatulove says founders should build relationships early. “The longer investors have known you and have been following your progress, the more comfortable they will be writing a check when you’re ready,” she says. “If you aren’t fundraising, consider blocking a couple afternoons a month for investor check ins.”
Delight your customers
Even as you focus on managing your cash, don’t lose sight of what matters most: building something great that your customers will love. In times of cash conservation, it becomes more important than ever to keep your eyes and ears on your customers, build and ship for them fast, and be intellectually honest on whatever signal you get back. This is not the time to build more features. This is the time to work on things that matter, and only on things that matter. Get a whiff that you’re working on things that don’t matter all that much? Pivot, and pivot fast. Whatever you do, don’t fool yourself.
If there is any good news in these uncertain times it’s that talent should become easier to come by, so now is a great time to hire great people. They will love working with you if you’re focused on what matters, too. “There will always be an appetite for amazing products and services,” says Jenny Fielding, managing partner of The Fund. Cat Hernandez, a partner at The Venture Collective, agrees: “Focus on building a business with solid fundamentals above all else,” she says. “Funding doesn’t dry up for great companies.”
Shoot your shot
The next few months—anywhere from 6 to 36, depending on whom you ask—may see a big slow down in venture capital investments. But opportunity, ambition, and innovation don’t slow down for anyone. The best companies in a generation will be made in this market correction, and smart VCs know this. The greatest entrepreneurs will be revealed. So, set aside what investors say and do, and focus on building the next big thing.
My colleague Rohre Titcomb, a five-time ultimate Frisbee world champion, frequently reminds our team: You don’t need “win pretty,” you just need to win. It’s okay to get a little bruised in the process. If you can build a scalable business without relying on investor dollars, your company will be the strongest of all. We will all be kicking ourselves if we miss out.