Because of our unique investing method, Social Starts has an unusually large portfolio of brand new companies. As a result, when most funds might see one or two examples of how companies are reacting to current challenges, we might see a dozen or more. Our method helps us pick up trends earlier and more deeply.
Last year, this antenna value let us see the current market downturn early so we were able to counsel our startup CEOs to hunker down, push toward revenue, minimize costs and focus on profit and survivability. This has helped our companies to achieve a high level of successful raises (15 of the 75 companies in our current moment-of-inception fund have raised new rounds with value increases of at least 25% in just the past year) and a low level of failure (only two companies have bottomed out so far).
As the real impacts of today's challenging market settle in, though, we are seeing a dramatic effect ripple through our portfolios like a chill wind.
Panic is how humans respond to too much information, especially tons of conflicting incoming information. Our innate fight-or-flight reactions become overwhelmed. We, literally, don't know what to do. The result is a whammy of physical and psychological responses that can range from racing away to hiding to frenzied attack.
Panic in and of itself is not a bad thing. It is a survival mechanism. But in our portfolio companies, we are seeing panic, and the responses to it, sort into two distinct sets, one with a positive impact and one decidedly negative.
The positive side of panic is that it compels response. The status quo suddenly and absolutely won't hold. Action is essential. When the startup CEO takes just one deep breath and considers the options before acting, the result can be hugely positive. We have seen CEOs suddenly cut their burn rate, fire non-performing senior team members, intensify their commitment to finding new capital, raise the bar on product fitness for current customers, stake out new revenue streams. Or, come to the rational determination that they are outgunned and so seek the safe harbor of an early acquisition.
On the other side, though, we have seen panic -- far more often than we would hope or expect -- leech the courage from some CEOs. Seeing all the challenges in front of them, they despair. For the first time in the long careers of our partners, we have seen some CEOs, tumbled by current tumults, simply give up. They have product in the market, feet on the street and money in the bank, but no more gas in the tank. They have simply walked away and returned remaining capital to investors.
What are the personal characteristics that lead a CEO to fold under pressure? We aren't 100% sure, but we are looking into this phenomenon hard. Our goal is to back founders who will win, or at worst, go down fighting 100% of the time. Strikingly, early indications are it may have something to do with privilege. The founders who have foundered, in the main, are among the best resumes we've seen. They have had huge success in the past, during the halcyon times of the past few years. Life and work have never laid a glove on them. So, this first slap in the face can be utterly shocking and bewildering. They retreat.
Founders who have fought their way up, by contrast, know what being pounded feels like. They have been knocked down before, gotten up and survived. They see no option of retreat. Every fiber of their being demands that they fight and win.
In tough times like these, early stage funds like ours need those scrappers as our CEOs. They fight, they endure, they survive. And in difficult moments like this, success comes to the survivors.