I have looked at tech from both sides now (h/t Joni Mitchell), as a three-time entrepreneur and as a venture investor through two downturns.
On the startup side, my first company, VXtreme, was acquired by Microsoft and became the platform for media streaming over the internet. My second experience was the rocket ship run up to an IPO and subsequent nosedive in valuation that characterized so many startups in the dot-com era.
My third startup had been in the market only a year when the internet bubble burst and had not yet found product-market fit. To survive, we had to take drastic measures, including two rounds of layoffs until we were able to merge with another company, which is still thriving today.
As a venture investor, I have invested in over 60 companies, and while many have gone public or been acquired, the journey has included pivots, near-death experiences and navigating through the 2008/2009 downturn.
Today, as people throw around scary words like cram downs, structure, ratchets, illiquid portfolios and wind down of funds, I truly empathize with founders of companies who are having trouble raising capital, have seen their valuation drop and are making tough survival decisions.
Every era is different, but here are some tips for our new normal:
If you’re out raising money, due diligence your investor
In a time of contraction, firms with funds that are close to their end of life will be under tight constraints and may not have allocated enough follow-on capital for their existing investments.
Reserve management can become an issue, and existing investors won’t be able to come through on their pro-rata amounts, especially if you’re conducting internal rounds or bridge extensions. So, as part of your evaluation of investors, you should ask which fund they are investing from, how far along they are in investing it and how much they hold in reserves for future rounds.
This will help you ensure that they can continue to support your future capital needs.
Be creative when tightening the belt
When capital is scarce, you have to be willing to kill your darlings so you can extend your runway.
At Rivio, my third startup as a founder, we came up with a zero-based budget plan after the dot-com bust that assumed we’d have no access to any future capital. We then drastically cut product features, re-thought our go-to-market strategy and rightsized the business.