Boom times are over: Venture capital firms advise portfolio companies on navigating the downturn

(BigStock Photo)

Extend your cash runway. Do more with less. And get ready for the boom times to be over.

Those are common threads embedded inside warning memos that venture capital firms are sending to their portfolio companies amid an uncertain macroeconomic environment and public market decline.

With ongoing inflation, geopolitical conflict, and other headwinds affecting businesses across industries and borders, tech companies are already starting to lay off workers and slow hiring.

Investors are also hitting the brakes after plowing a record amount of capital into startups. Global venture funding in Q2 is expected to decrease 19% quarter-over-quarter, according to CBInsights. Startup valuations are also taking a hit, and analysts are predicting “down rounds” — when companies land new funding rounds at lower valuations compared to their most recent raise.

Here’s a sampling of what venture capitalists are advising:

Andreessen Horowitz: “Reevaluate your valuation, understand your burn multiples, and build scenario plans.” — via a16z blog.

Y Combinator: “If your plan is to raise money in the next 6-12 months, you might be raising at the peak of the downturn. Remember that your chances of success are extremely low even if your company is doing well. We recommend you change your plan.” — via TechCrunch. Related: Save Your Startup during an Economic Downturn

Sequoia Capital: “We do not believe that this is going to be another steep correction followed by an equally swift V-shaped recovery like we saw at the outset of the pandemic … The era of being rewarded for hypergrowth at any costs is quickly coming to an end.” via The Information.

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Lightspeed Venture Partners: “Many CEOs will make painful decisions in order to keep their companies afloat in choppy waters. Some will face tradeoffs that only a few months ago would have seemed outlandish or unnecessary. We see a silver lining, however, when hard decisions present themselves.” — via Lightspeed blog.

We also caught up with Jason Stoffer, partner at Seattle-based firm Maveron, which just raised a $225 million fund. Here is what Maveron is telling portfolio companies right now, according to Stoffer, who shared the following with GeekWire via email:

  1. The pre-IPO financing market is largely closed right now.
  2. Even the best private companies are raising inside rounds if they need capital. This is largely due to two factors: (1) the ability for anyone with growth capital to invest to buy in to public names at vastly reduced valuations and (2) the fact that there is deep uncertainty around how to price private assets.
  3. The last few years have led to excesses. When you can raise almost unlimited capital at very high valuations, you tend to spend it. Hence CEOs did not have to make choices and a lack of prioritization led to sloppiness. Companies embarked on too many projects, rather than fewer projects executed well. Companies hired too many employees, when you could have done more with less. An excess of venture funded competition led to the economics being competed away in areas ranging from rideshare to food delivery to consumer goods. Some founders never learned that ultimately businesses need to have strong underlying economics and be self-sustaining.
  4. Since the fall, when early signs of macro choppiness emerged, we have been urging portfolio companies to take action. Raise capital or cut expenses to get to 24-plus months of cash runway. Prioritize and do more with less. Become world class at capital allocation. Do not expect a liquidity event any time in the next few years and plan accordingly.
  5. Scenario plan for different futures. One is where the Fed navigates a soft landing and the economy gets back to normal quickly. The other extreme is many years of inflation woes, reduced consumer spending and geopolitical conflict.
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