Too Many Existing Companies Merely Delayed ‘Cash Out’ Dates Without Yet Changing Their Fates.
If 2022 was the year of the startup layoff, 2023 is going to be the year of the wind down. It will suck — for team members, for founders, for customers of these companies, and for their investors — but by the end of the year we’ll have gotten through the toughest part of the correction.
I wrote this paragraph because we’re all coming back to work after a holiday break and wanted to preemptively address one of the two questions that seem to be taking 5–10 minutes at the start of every meeting. (Regarding the second question: yes, it was a very nice time with family).
My POV isn’t derived from a sophisticated macro analysis of the financial markets since that’s not my specialty. And isn’t accompanied by any universally applicable strategy that all teams should follow. That’s not how early stage venture is done IMO — each company has its own reality and as investors we should service founders to their needs, not some overgeneralized advice. But asserting we’re heading for increased pace of closures comes from a few on-the-ground observations:
- 2022 Layoffs and cost cutting have preserved already raised capital but in a significant number of situations this has just kicked the ‘are we investable’ ball down the road.
- In 2023 there will be a number of Series A-D companies that cannot clear that bar. And not enough venture investors willing to provide ‘bridges to nowhere’ (low growth, middling margins, no natural acquirers, team attrition ongoing, and so on). Think of it this way: add up all the anticipated 2023/24 capital needs of existing startups not in the top 10% of performance. It’s going to be larger than the ‘dry powder’ private investors are allocating to deploy into second decile performers.
- And there’s still quite a bit of valuation compression that needs to occur in order to reconcile private marks with public stocks. This might not deter all venture investors, but it will deter crossover funds.
I say this all very much being a technology optimist. There are many startups accelerating their growth right now, and founding teams working on ideas that will become the next generation’s defining platforms. But as professional investors we can’t avoid responsibility for managing out the realities of our portfolios. If we avoid these conversations you have no hope of turning a company around, finding them the right home where the work can continue, or assisting executives with the stress and moral choices that come in a struggling business.
Founders in situations where profitability isn’t a near term strategy should be working with their VCs to understand Are There Milestones We Can Hit Where There’s More Capital Available To Us From Existing Investors and What Milestones Do We Need To Hit For Us to Attract New Venture Capital, while also building their own direct relationships (remaining fully dependent on your investors for access to capital markets is always a risk).
VCs should not be afraid to ask their portfolio CEOs whether the current plan gets them to an investable milestone, and are they Spending Existing Capital in a Manner Which Will Build Enterprise Value? In the cases where answer is no, we should not be afraid to try and revise the plan, or suggest that a soft landing or partial capital return is out of the question. Burning through millions of dollars with just fingers crossed rarely benefits anyone. Note, this is different than going down to the wire to try and execute an strategy which, if successful, does change the profile of the company (a big product release, a major customer win, a pricing change, etc etc).
Founders, make the toughest decisions early in this year. If you don’t have the energy left to pivot or cut to profitability, is there another leader at the company who can? Be willing to reset valuations now if the incoming capital is from a good faith partner and it gets you past the next 12–18 months.
2022 is done. 2023 shouldn’t be status quo.