As a startup founder, how do you navigate a market down turn?
Over the past few weeks I’ve seen several well thought out frameworks and other commentary from leading VC firms that are trying to help their companies adjust to what seems like it will be a new normal, at least for the foreseeable future.
I felt each of these groups had pulled together some thoughtful resources, but I keep coming across founders that haven’t seen them yet. So I decided to compile some of the best resources here. Feel free to send me a message on twitter (@wright_jordan) or LinkedIn if there’s a resource you feel ought to be included here.
Sequoia’s lengthy, albeit incredibly insightful piece. Some key topics they cover:
How we got to the current market down turn.
Impact on public and private markets.
Lessons from history.
Who survives a downturn like this.
A phenomenal example about how Airbnb handled the COVID-19 impact on their business.
A16z’s framework for navigating down markets. Key components are:
Reevaluating your valuation.
Controlling your burn - an insightful way to consider your burn in terms of revenue multiples that I think could turn into a new normal way for founders to pitch themselves.
Scenario plans for the base case, best and worst case.
Y combinators letter to founders was published in Tech Crunch.
Reference to the famous “default alive” comments by Paul Graham. Meaning “Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die?” (“Default alive or default dead?” by Paul Graham)
Fund raising advice for down markets.
Advice for talking with VC’s.
Reference a broader video on this topic that is worth watching: https://www.youtube.com/watch?v=0OVSTWozvfY.
LinkedIn post from Sandeep Patel from QED
Being financially responsible is evergreen advice.
Worthwhileness vs. survival.
Dark times can bring about good tidings.
I close with a few personal lessons learned during this time period.
Always remember, as a founder you raise money when it wants to be raised. We’re so grateful we accepted a preemptive $40 million Series B when offered to us in October of 2021. It makes the future extremely bright for us, and gives our customers confidence that we’re in this for the long haul. I realize not everyone had this luxury, and we’re grateful for that, but I know of some that had offers to fund raise and scoffed at valuations they thought were beneath them. I think they’re singing a different tune now.
Lean into mission. For us at Atomic Financial, we are grateful for the position we have - working with 8 of the top 10 neobanks, as well as hundreds of other amazing customers - to help the most financially vulnerable in our society. Over 17.8 million people used Atomic last year. As we consider the impact this down market will have on every day Americans we’re more confident than ever in our decision to build a company whose mission is to help the most financially vulnerable people in our society. It gives us purpose when we come into work each day. Impact is a key reason behind what products we bring to market, including our new Earned Wage Access like products.
Don’t always take the highest valuation. We have seen plenty of other startups take the highest valuations they could. It may be good for headlines, but you should always be thinking “if markets normalized, what would my startup really be worth? Can I get to that valuation within 6-12 months of this fundraise?” Your investors may not want you thinking this way, so you may need to fight that at times. I know of several startups whose employees must certainly be under water on their options, given the high flying valuations they were willing to accept.
Always be cash conscientious. Whiplash has hit all of us in the past few months, but the amount of whiplash varies based on how companies were handling themselves when cash came freely. If you’ve spent responsibly in the past there might be a mild tightening in your company during recent months or the coming months, which I believe employees understand, but some companies are experiencing massive whiplash as companies try to figure out how to cut costs in the current environment.
You owe it to your team not to over hire! Few things kill culture like layoffs. In February of this year my co-founder and I felt we should not be hiring as aggressively as we had been in the prior 12 months. We decided to pause to allow our teams to gel ahead of our May onsite. Now, as other companies are dealing layoffs we’re fortunate to be able to continue to build with a key group of people that mean the world to us and for whom we have not violated their trust in us. No one knows the future, but leaders of companies have to do all within their power to ensure they scale responsibly for everyone involved.