Sorry for the late-summer posting lull, but September always brings the re-start of the venture conference season… and we had a nice power outage, to boot! Ike passed through, but now all tree branches are removed, all wires restrung, all transformers replaced – so we are back in business.
There was a nice post today by Jeff Busgang on PE Hub about how VCs are weathering the latest macroeconomic turmoil, and in general, I agree strongly with the premise of the post: I, too, am a short-term bear and a long-term bull.
The main point I wanted to highlight in this article is found about halfway down the article:
The holding period for early-stage start-ups is typically 6-8 years, and so an episodic recession shouldn’t materially affect long-term value creation, so long as follow-on financing is available. One VC observed that his partnership had done an analysis and realized that, “we have 20 companies in our portfolio seeking follow-on financing this year. They’ll nearly all get done, but none of them will be meaningfully up rounds. Instead, there will be many flat and down rounds ahead”.
In our business, we are seeing the same trends, but perhaps even more exaggerated – we have mentally braced ourselves, as very early stage investors, for 7-10 year holding periods for a majority of our investments. We are strongly counseling all our portfolio companies to be as capital efficient as they can be, stretching out their budgets by delaying non-essential hires and other expenses. We have always known that most early stage businesses require long runways to be successful; now, more than ever, that means growing with a “scrappy” mindset, and finding creative ways get more while spending less.
If you are an entrepreneur you need to spend some time thinking about what this means for your business. There is still plenty of capital out there, but it is generally much more conservative than it has been in the past – hence there will be smaller capital rounds for all but the best startups. And don’t forget to think about appropriate valuation (a topic for another post).
We just had a meeting with some entrepreneurs last week who came to us with a Series B deal: they had a nice, completely functioning product, but only a few customers after 9 months in the market, and very little revenue. They were seeking $10-12M to support a company of ~25 employees and monthly burn of about $550,000.
I don’t know what boom cycle these guys are living in, but I don’t think I could go before a VC and ask for such a large amount of money to support such a bloated burn rate. Better to do some “house-cleaning” first – get your budget in order, reduce your burn by half (or more!), and focus on preparing your company for the long slog that is the commercialization period of growth. You almost have to be a cactus, so you can survive the drought.
Let’s hear from some entrepreneurs out there – how are you preparing your business to survive, and even thrive, during this latest dry spell?