with falling At Silicon Valley Bank, founders find themselves in a dilemma when looking to raise equity or debt. Most companies run their business solely with equity capital and have access to venture debt facilities. Investors’ access to debt is a “break glass in case of emergency” facility, which allows companies to not be stiffed when they should be raising rather than raising those tied to business standards. While much of the venture debt market is slowing or pausing new loan originations, one thing is certain, this lack of runway capacity will inevitably lead to behavioral changes on all fronts.
And a behavior change or reset is much needed. Before this additional chaos, the startup funding environment was already tested. The fact is that most founders and venture funds currently do not know what the market value of startups is – and now the opportunity to start again does not present itself in valuations, but in what we as an ecosystem do with it. Expensive money.
We know that if a founder were to raise their 2021 round of capital at today’s multiples, the results would be meaningfully diluted, which is why it’s important to adopt a cash-strapped approach. Combine a slow equity market and less debt capacity/flexibility, and founders enter a time when they need to raise more equity or be more efficient with less.
The reality is that most founders and venture funds currently do not know what the market value is at startup valuations.
One retro-cool phrase experiencing a resurgence in our industry is effective growth. Even typing it feels like watching paint dry because when this phrase is uttered, people jump to CAC/LTV meters, burn efficiency, OpEx ratios, and of course the good old rule of 40. It means effective growth. A major topic of conversation among investors, and I’m a long-time proponent, but that mindset hasn’t exactly been mainstream in the industry in recent years.
Through the lens of early-stage investing (seed to Series B), here are a few things I think resonate with VCs and founders should consider as they plan and execute:
Efficient unit economics is driving growth.
The multi-year customer acquisition cost (CAC) payback is 2021. Understanding how to make it more profitable is essential to efficient growth and finding VC funding for that growth.
- Change the company’s mindset to inchworm growth. Raise OpEx ahead of results to support and enable growth, but pay to make sure you can afford it. Expand it as you see its progress. In the past couple of years, companies have assumed that support rounds will fill in the gaps if time is scarce – which is no longer the case. Grow to opx and expand respectively.
- Move from sequential thinking to product and development initiatives in parallel.
