Sequoia Capital is the latest big name VC to warn founders about uncertainty in venture capital due to inflation and geopolitical turmoil. Slides here.
The cost of capital has gone up, valuations in public markets have gone down and are paying less for growth, the impact of these shocks will have second order and third order effects (like housing prices up 60+%).
In the short term, profitability is favored to growth in a downturn. While the Nasdaq is down, Morgan Stanley’s unprofitable tech index is down 64%. In the mid to long term, durable growth is best—improving margins and growth.
The drop in the market is steep and recovery takes a long time.
Be quick to cut expenses to avoid a death spiral. “In 2008 all companies that cut were efficient and better.” It’s not about being the strongest, but being the most adaptable.
There’s an opportunity in a down turn. FAANG companies all have a hiring freeze. Your competitors may not adapt and end up in a death spiral.
Links to this note
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Running a Startup During a Recession
Startups are a microcosm of the economy and we can observe that things are changing quickly towards a recession footing. The effects of inflation on valuations are readily apparent, but we also see that things were too good to be true and investors and late stage companies exploited it.
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It becomes exponentially more difficult to make up for losses as they increase. A loss of 90% would need a gain of 900% to recover from it. Cutting your losses is important so that you don’t fall into the trap of an exponentially larger hole.
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Many Startups Will Run Out of Cash Starting End of 2023
In Startup Decoupling & Reckoning by Elad Gil, the author lays out the situation many mid-to-late stage startups will be in starting at the end of 2023. Companies raise capital for 2-4 years of runway. Valuations have risen sharply compared to public markets. Raising money will be more difficult as startups that don’t have product-market fit will not hit key milestones relative to their valuation.
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Time Between Series a and Series B Is 31 Months on Average
In 2023, the average time between raising a Series A and Series B round increased to 31 months according to Crunchbase. With startup funding falling 67% in 2022, more startups could face a difficult time getting funding. Some predict startups will run out of cash in 2023 with the most fiscally conservative ones run out in 2025 unless conditions change.