The good news is we’ve seen those kinds of crises in 2008. Before that, in 2000, in 1984, and a flash of it in 2020 (Covid19), and survived.
The bad news is it is painful. It was painful back then and painful today.
The ugly part with the bullish market in 2020-2021 and way over-inflated valuations, is that it will be very hard to return the investment to those who invested in an over-inflated market.
The pretty part is that those who raised a lot of money and have figured out a way to keep it or reach profitability will win big time.
To understand the startup funding challenges, you need to start with basic investors’ mentality. If you invested during 2020-2021 and in particular beforehand, then you have seen the value of your investment going through the roof, regardless if it was S&P500, Nasdaq, startups, or even more extreme cases like cryptocurrency, NFT, or any other mind-fart.
If you weren’t part of it, you have seen others making fortune through investments that perhaps didn’t make sense. That drags people into the always-up bearish perspective of “I’ve made tons of money in investing – therefore I’m a genius and I should be investing more into even more risky investments.” Or “everyone is making money, I want it too.” Or the most common approach of all, “I’ve made 20-30-40-50% on the stock market, I should take some profit and allow myself to invest in high-risk investments like startups or VC.”
Unfortunately, the bullish market era ended with a splash, and a bearish market took its place. Together with it a bearish market mindset. The profits people meant to use for investing in startups disappeared, or lost 25% on the S&P500 index fund. The investors don’t want to sell while losing, or more commonly, they thought that startups are risky and dound out that S&P can be very risky.
Add to that the inflation and higher interest rates, and all of a sudden for potential investors getting a 4-6% interest rate on USD is not that bad, and it is risk-free.
The result is people are inclined to invest in a startup in a bearish market, and even those who made commitments to VCs prefer not to invest. I’ve heard some VC partners quoting their LPs, saying that in the case of a capital call, they will keep their commitment, but prefer that you don’t call them.
VCs on their side realize that, preserve cash for the existing startups, and refrain from investing in new ones.
For entrepreneurs – it is winter time. Raising capital is harder, longer, and results in way less during the winter. The good news is that there is always spring after the winter.
But investors are right. Winter is a bad season to invest in. In fact, the return on investment during other seasons is higher than the investment made in winter time, and the reason is the next round.
The next round is still going to be in the winter time or just at the beginning of the spring and insufficient traction (due to insufficient funding in the first place) will make it harder to raise capital and in many cases that will slow down the startup journey.
What Can Startups Do? Go Back to Basic
· Solve a problem – solving a problem is the best way to create value. You need to create value in order to justify your existence. Your investors will give up on a company whose value is unclear.
· Focus – do one thing and one thing only, don’t spread. If you are trying to demonstrate product-market fit, don’t try to build a business model at the same time, or don’t try to go global. Serve the business, not the investor.
· Adjust objectives and in particular adjust the organization to the objectives. At the end of the day, the most expensive part of the journey is the next month, when your organization is overinflated. It is still overinflated this month, in the next month, and the one afterward.
· Aim for profitability faster. It may be your objective if it is feasible, but the closer you get there, the less burn you carry with you, and the available cash will last longer.
Think of the burn and run rate again. If your revenues per month are $200k and your expenses are $600k, and you have $5m of cash, your run rate is a year. This may not be enough to get out of the winter. But if you can turn revenues to $400k a month, then you have two years of run rate.
Adjust quickly, don’t wait.
