Venture investing, like all areas of business and life, goes through cycles. Summers of overheated exuberance are followed by winters of discontent.
Today, early stage investing is in one of its “down” cycles. This means that investment money, especially at the Series A level, is getting hard to come by. A Round investors are placing ever higher requirements on companies they back and pushing for tougher terms than we have seen in years.
This dour period at the developmental stage might last just a few months, or it could freeze in place well into next year.
The wise entrepreneur should plan for the colder outcome and then rejoice if the sun breaks through earlier than anticipated.
The watchword for winter is ENDURE. If you don’t put enough potatoes in the root cellar, you might not survive until spring, and so have a chance to succeed in summer. Here are four endurance tactics we see our leaders from our portfolio companies adopting right now:
- Evaluate your spending, and cut wherever you can. Every startup has essential expenses. But most start-ups also have many discretionary costs: money spent in hopes of expanding sales; money spent on that next big tech idea; international expansion; high profile hire. Look over your costs and simply do not spend a penny you don’t have to. Only increase spending after revenue has increased. Every day a dime stays in the bank is one small step closer to survival.
- Expand your revenue streams. Series A investors today are obsessed by revenue. But they don’t see all revenue as the same. Massive dependence on a single customer, for instance, is a big red flag. It is far better to have strong revenue performance across a substantial set of customers. Too much focus on a single market sector can also inflame A Round paranoia. If at all possible, be testing revenue from your second market segment as you are maximizing revenue in your first arena. Revenue from multiple customers in multiple markets is the mantra at the Series A right now.
- Focus on unit economics. That hockey stick graph is fine, but A Round investors now are digging deep on financials. Today, unit economics rules. Ok, revenue is growing, but how about acquisition cost; or-is it dropping? Usage patterns deepening? Churn dropping? Gross margin strong and rising? Revenue per employee looking good? These and other core factors stand at the heart of commitment and valuation discussions at the Series A today. Great entrepreneurs right now should be obsessed by these numbers. Their potential investors certainly will be.
- Endure. As many venture pundits have said, Job One for an entrepreneur is: don’t go out of business! Never has that been more true than today. In this period, success is most likely to come to those companies who can survive long enough either for the overall market to turn upward, or until they can reach operating metrics so overwhelmingly positive that Series A investors can’t hold themselves back. Companies that run low on customers, revenue, energy and funds will turn to dust. The company that hangs in, however long that may take, will be a candidate to ultimately harvest a strong round and celebrate success.
It's Darwinian out there. Accept that challenge. Adapt. Adjust. Survive.