‘Cash is king’ as VC Spigot slows down

A year ago, startup founders were often up against venture capitalists eager to grab a piece of any promising young company with rapid growth potential. Investors were competing in an increasingly heated environment in which they were often under pressure to close huge deals in a matter of days. Altogether, venture capitalists spent a record $643 billion in 2021, nearly double what they had the year before.

But the times are changing. Global Venture Investing in Q1 2022 fell 13 percent quarter over quartermarking the first time in a year of funding records when seed capital investment fell from one quarter to the next.

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The rise in inflation, the stagnation of the IPO market and the continuing instability caused by Russia’s war in Ukraine have injected new caution into investing in start-ups. As a result-with the next VC check suddenly not as secure as it might have been a few months ago—Investors and others in the industry say startup leaders should consider cutting costs and conserving cash.

Jay Daspartner, president and co-founder of sapphire companiesHe said his firm is evaluating portfolio companies on a number of metrics to make sure their cash consumption is where it should be.

Cash burn essentially refers to the rate at which a startup spends its venture capital. The issue is especially important for venture-backed startups, and especially when the fundraising environment is iffy. This is because start-ups are generally not yet profitable: the income they generate is usually reinvested in the business in an attempt to scale as quickly as possible.

Das said he is making sure that the general, administrative and research and development expenses at his portfolio companies are in line with those of other companies, including those that are public, in the space. He also makes sure the sales and marketing teams are hitting their quotas and building channels.

“Cash is king right now,” he said. “I’m trying to tell people that now is a bad time to raise money and that I should have at least 18 to 24 months on the runway.”

Pull out the fire hose

Startups can widen their path by cutting back on hiring, shedding big expenses like real estate and, in rarer cases, laying off employees.

While we have yet to see widespread bloodshed in the industry, several prominent startups have laid off employees en masse this year. The most prominent of these is the start-up of mortgages. better.comthat supposedly has cut his template from about 10,000 in December to less than 5,000 as of this month. Company leaders blamed a declining mortgage industry and said the cutbacks, while painful, “will further position Better on its path to profitability.”

Other startups with significant layoffs this year include:

But despite some high-profile examples of cost cutting, investors we spoke with say they are largely advising their startups to stay the course and factor in spending cash, while still aiming for solid growth. .

this time is different

Some startups continue to post strong growth numbers despite the downturn in the venture capital market. yash patelgeneral partner in Telstra Companies, said he still sees later-stage portfolio companies with strong fundamentals that are growing 2x or 3x. In those cases, what he is more concerned with is creating more runway for companies than cutting costs.

“I think extending a round makes sense now,” he said. “We don’t know how long this can last. … Taking a little more dilution now to grow cash may make sense. Buy more track.”

He believes that early-stage companies are less affected by the recession at the moment, although many of the new founders of these startups may need to temper their expectations as the funding environment is different from last year.

While Patel said he planned to see rounds with pay-to-play provisions, he has yet to see them during the recession. Pay-to-play rounds basically require existing investors invest pro rata in current or future rounds or lose some of their preemptive rights. These provisions are sometimes added to downside rounds to make sure previous investors pay up.

Reducing hiring provides another way startups can conserve cash, in some cases adding only a fraction of what they expected to add to their workforce this year, Patel added.

Profitability is also something to talk about more, but so far in the talks it’s not an investor demand, Patel said.

“I’m not as concerned as in previous cycles,” Patel said, adding that the current environment is very different from March 2020, when many thought a Black Swan event was underway.

conserve cash

The main way companies control cash burn is by managing fixed costs, he said. Stefano Boniniassociate professor at Stevens Institute of Technology whose research has focused on corporate finance and venture capital.

Fixed costs “will eat up all of your company’s financing if you’re not careful, especially in a high interest rate environment,” he said.

Headcount growth is one of the easiest ways to manage fixed costs, Bonini said, so it’s likely we’ll see startups pull back on hiring. When hiring, many may choose to carefully select candidates who are more expensive but can contribute to the company in the long run.

Compensation packages may also lean more toward equity rather than cash, he said.

Many startups will benefit during the current “adjustment period” from the cost cutting they made when the pandemic hit. In 2020, companies rapidly shifted to remote workplaces, lowering fixed costs for office space and travel, Bonini noted.

Some of those fixed costs are unlikely to return to pre-pandemic levels, he added. “It lowered costs for a lot of companies,” he said. “Renting offices in Silicon Valley or New York City is expensive.”

Fundraising in 2022

As last year ended, Ken Ahrens and his fellow co-founders of the Atlanta-based SaaS startup speed scale considered leaving for a Serie A.

“We wondered if we were moving too slowly,” said Ahrens, the company’s chief executive.

However the AND Combiner the company was doing well, with money still in the bank from its seed round in late 2020 and paying customers.

“The key to fundraising is having something really smart to spend the money on and we really didn’t do that,” he said. “We wanted to work on adapting the product to the market and work on the business.”

Ahrens hopes the strategy will pay off. He understands that the current market is difficult to obtain funds, but he hopes to close one more round closer to the end of the year. At that point, he believes he will be able to show investors strong growth metrics, as well as the product’s market fit.

“I don’t regret it,” he said.

The seven-employee company is fairly budget-disciplined and always has been, so there hasn’t been a need to control cash burn, Ahrens said.

“We are closely monitoring our numbers,” he said. “We’ve made a few adjustments here and there, but we’re still about 90 per cent on our plan from earlier this year.”

The company is tapping more into the contractor market for both engineering and sales. Ahrens said that he likes working with contractors. It allows the company to expand certain projects that work and close others that do not.

Although the company has a “broad runway,” to reach the goals the company already has set in 2023, the company will need to hire, and that means a Series A, Ahrens said.

“I feel optimistic for us,” he said. “The market is turning to self-sufficient companies and I think that will help us.”

A new sense of caution

In Latin America, which was the fastest growing region in the world last year for venture funding, investors are also considering how to deal with a changing economic environment. While funding levels remain historically high, the region saw a slowdown in Q1with the most pronounced receding in later stages.

“People are more careful with valuations,” he said. Wenyi Caifounder and CEO of startup backer based in Colombia polymath companies. Meanwhile, investors in companies planning public offerings this year have largely delayed projected IPOs by at least two to three-quarters.

With late-stage startups likely to stay private longer and face a more challenging fundraising environment, it’s more imperative that teams demonstrate the ability to operate and grow on a tight budget, Cai said. This should not be a problem for many Latin American unicorns, particularly those who learned to scale when venture funding for the region was much lower.

Others who grew up during boom times, however, “grew up with high overhead and not a large economic unit,” Cai said. They will need both discipline and time to grow to their highest ratings.

matthew koertgemanaging partner at telstra Companies, He said his firm tries to be proactive with portfolio companies that may be in trouble. Sometimes that includes helping them make tough decisions.

“The focus here is on cost base reduction, break-even cash flow, restructuring and refinancing to help them survive to the next stage,” he said. “We haven’t gotten there yet, but we have experience driving startups through tough fundraising periods over the last 20 years, including during the dot-com bust.”

Joanna Glasner contributed.

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Illustration: Dom Guzman

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