Sach Chitnis
With the collapse of Silicon Valley Bank, founders find themselves in a predicament when looking to raise either equity or debt. Most companies run their business on equity capital alone and have access to a venture debt facility. Access to venture debt is a “break glass in case of emergency” facility in that it enables companies not to be as hardened when they must raise rather than raising tied to business milestones. When a majority of the venture debt market is slowing or pausing new loan originations, one thing’s for sure, this loss of runway capacity will inevitably drive behavior change on all sides.
And a behavior change, or a reset, is sorely needed. Prior to this added chaos, the startup funding environment was already challenged. The reality is that most founders and venture funds don’t know what the market price is on startup valuations at the moment — and now an opportunity for a reset of sorts presents itself, not on valuations, but what we as an ecosystem do with its precious cash.
We know that if a founder raised their 2021 round of capital at today’s multiples, the effect would be meaningfully more dilutive, which is why embracing a cash-efficient approach is important. Combine a slower equity market and less debt capacity/flexibility, you enter a time where founders need to raise more equity at higher dilution or be more efficient with less.
One retro-cool phrase experiencing a resurgence in our industry is efficient growth. Even typing it feels like watching paint dry because when this phrase is uttered, people can’t help but jump to metrics like CAC/LTV, burn efficiency, OpEx ratios, and of course, the good old rule of 40. Efficient growth is a mainstay topic of conversation among investors, and I’m a longtime proponent, but that mindset hasn’t exactly been top of mind in the industry these last few years.
With a lens on early-stage investing (seed to Series B), here are a few things I think resonate with VCs right now and the factors founders should consider when planning and operating:
Efficient unit economics are driving growth
Multi-year customer acquisition cost (CAC) payback is very 2021. Understanding how to do more of the same profitably is essential to efficient growth and to finding a VC to fund that growth.
- Change the mindset of growing the company to that of an inchworm. Grow the OpEx ahead of results to support and enable growth, but tollgate it to prove you can catch up. As you see the growth, expand. In the past couple years, companies assumed funding rounds would come to fill voids if there was a timing miss — that doesn’t exist anymore. Grow into the OpEx and expand sequentially.
- Move from a serial mindset to a parallel one on product and growth initiatives. Yes, focus is always important for an organization, but considering that in recent years, start-ups often saw the next round of funding in sight before issuing a press release on the last round, it’s no surprise they got more aggressive on product development and overall expansion. Now, the focus should be to organize teams to collaborate on focused efforts, make hard decisions on priorities, and unlock more efforts with results.
Cash-efficient approach is king
Remember that cash is expensive now. Efforts to extend the runway earlier impact the dilution later and the options that will exist. A close cousin to getting unit economics tighter is focusing on burn efficiency. The burn over your revenue growth tells how much you’re spending to get growth. The ratios should be different based on stage, balance sheet, and industry, but I would summarize that a path to 1.0 is ideal in Series A and B, and realistically targeting 1.5x if investing ahead on product or sales. The Rule of 40 is another way to assess this, but for early-stage companies, it obfuscates this efficiency as it’s in percentages that mask the absolute investment.
Get to levered growth
This might sound debt-related but actually refers to seeing non-linear scale from similar operating efforts. This is what Series B and C investors look for: how to attain growth from efforts rather than just doing more of the same. In raising a seed round, you prove you have a big market and solid team. Raising an A, you convince your investors you have product-market fit (PMF) and early indications of scaling growth. When raising a B or C round, you should have proven the repeat-rinse model of selling but want to accelerate growth with funding. Showcasing early signs of expansion is what gets investors excited for the next stage:
- Allocate marketing dollars to high ROI channels rather than spreading it thinly across multiple channels
- Showcase growth in ACVs through product expansion or by moving upmarket to larger customer segments
- Early indications of increased cross-selling and expansion within current customers
Sales efficiency comes in several forms: A steady and constant increase in the average quota attainment across sellers is a huge input to levered growth.
Pay attention to “canary the in coal mine” metrics
In recent years of flush cash, I’ve observed companies get sloppy on operating discipline since there was more slack in the system. By putting together early indicators emphasizing go-to-market (GTM) metrics, companies can identify potential issues and make the necessary adjustments to avoid major setbacks. GTM metrics I recommend tracking include:
- Pipeline coverage: how much pipeline to budget, a decreasing coverage rate is unfavorable
- Net pipeline build: aim to have a positive value, with new pipeline adds during a period (month/quarter) greater than the outflows (closed won/losses)
- Top-of-funnel conversion: Is your conversion rate from marketing qualified leads to sales qualified leads declining?
- An increase in sales pipeline duration, specifically a slow-down in the middle-funnel stage (prospects are taking longer to decide)
- Declining win rates overall (SQL to closed/won) (admittedly, this is a lagging indicator, but a universal metric that should be tracked)
- Average rep quota attainment is under pressure (and declining)
Context matters. Nothing I’ve shared is intended to be comprehensive because scaling a start-up is hard, and there is no one way to do it right. That said, resetting expectations to match market realities helps set the tone for operating within the market environment. Everyone seeks higher valuations — and higher valuations from the prior round are great (and also feel good), but that goal shouldn’t dictate how we build good business. It may sound a bit cliché, but countless ticker symbols on the Nasdaq are companies built during economic downturns with a focus on efficiency and scrappiness. It’s time we get back to basics and build more efficient businesses.
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