Over the past month, we have been receiving inquiries on our financial health (cash position, burn rate, runway, etc…) from many investors. Both public and private investors have been rattled to the core with the recent market crash.
Even though VCs raised a record sum of capital in 2021 ($130bn according to Pitchbook-NVCA Venture Monitor), many are focusing on portfolio management instead of deployment.
The logic is simple. If the VCs invest now, will this company survive until the next round? Even if the next round means IPO, will the public valuation be high enough to return their investment? Furthermore, many LPs are underperforming and thus unlikely to back the VC funds themselves.
Only the best companies with outstanding metrics will be able to raise funding. And more specifically, unit economics will dethrone growth as the new lord. Companies in the middle will face immense pressure fundraising and have to swallow stringent conditions and/or flat and even down rounds. Looking back to the recessions in 1989, 2000 and 2008, they all took about two years to recover. Therefore, expect this current one to last at least as long as Covid has.
Here we have listed ten tips to help fellow founders navigate the challenging times:
Cash is king. Most of us have been focusing on growth in the past few years. This is the time to think whether that growth is sustainable without additional capital.
Prioritize products that can monetize. Have an open conversation with your management team and brainstorm what are the products that can generate revenue. Even if you don’t have that product, what can you do to begin working towards launching that product?
Certainty over price. If you are having financing discussions now, try to close them out asap. Don’t over-optimize for valuation and terms. Facebook raised a 33 percent down-round in 2009, 9 years after founding. Amazon raised a highly dilutive convertible round in 2000 and would’ve failed if they waited another month.
Raise money when you can, not when you need it. Ensure you have a minimum 18 months of cash runway. Speak to your existing investors, ask for honest feedback and gauge what exactly is the existing appetite from your investors. Understand how much capital you will have access to and how much more you have to raise to ensure sufficient runway.
Explore debt and alternative financing. There are plenty of venture debt funds out there both in India and overseas. However, this won’t be easy since these funds are likely to have been impacted by the recession as well. Plus, debt financing is an entirely different animal from equity. So you may end up spending a lot of time with minimal return. However, if the opportunity presents itself, don’t shy away.
Leverage free credit products in the market. This may sound like an advertisement, and in business when it sounds like an advertisement, it usually is. Jokes aside, there are companies in the market that provide free credit to startups that qualify. Many of our customers leverage on the free credit to improve their working capital.
Prepare for the worst and hope for the best. Remember revenue and cash levels always fall faster than expenses. Speak to your management team, engage your board and start scenario planning.
People are #1. Be transparent with your team and communicate non stop. Instacart slashed its valuation by 40% in March 2022 to attract talent. Need to make sure you have talent density. Those who choose to stick around are your future leaders.
Speak to your customers. Everyone is feeling the pinch. More than ever, right now is the time to be super focused, understand their pain points and double down on products to make sure your product/service is indispensable.
Crisis means opportunity. If you navigate this well, you will most likely be buying your peers at discounts and emerge as the winner in the next couple of years.
(Kartik Jain is Co-Founder, Karbon Card-a neobank focused on SMBs and startups)