Show Me the Money – Advice for Founders in 2022

This piece was originally included as part of our “For Your Information” triannual newsletter on September 6th, 2022. If you would like to receive this newsletter, please subscribe here.

The US VC industry has raised a record amount of capital in the past few years including, an, ahem, measly, $128B in 2021. Yes, B as in billions (this is cash, not the TV series). According to the IMF, this would rank as the 59th largest economy by GDP in 2020 just ahead of Morocco. But, where is this capital for the start-ups?

It is not a secret that the industry has slowed its investing pace, down 27% year over year. We have seen the cooling of the industry and by our observations, it was long overdue. Cooling, however, does not mean a freeze. And while more discipline is being applied by VCs, most of us are still investing. How and how much has changed a bit, however.

Due diligence will remain an important part of the process and that isn’t a bad thing. While the market conditions aren’t what they were in 2021, the opportunities to go back to doing things in the ways we prefer are; spending hands-on time with teams pre- and post- investment was not a luxury we had during lockdown. We are getting into the weeds again and performing due diligence in the way we want. A disciplined and complete diligence process pays dividends to the VC and the potential portfolio company. It allows each side to fully understand the opportunities and obstacles on the road ahead and head into the next phase of growth with full alignment.

Advice to Founders

Our advice to our portfolio companies and founders has been simple. If you are fortunate enough to be hitting your forecasts and growing at rates with corresponding performance metrics that are at or better than expected of high performers, stay the course. Great companies are still raising capital, albeit not at 2021 valuations. For most, valuations have adjusted to more normalized multiples and approaches. Irrespective of the perceived devaluation, these companies are to be commended for their ‘success’.

If you have not yet achieved the state expected of your stage, your options are more limited. Venture capital may be available, but generally in amounts and at a valuation that is not close to what you may have been able to achieve in 2021. For those CEOs who tried to stretch into 2022 for even better valuations, you may be regretting it. What these companies need to manage to is breakeven.

Options are an insider round, venture debt, trade financing, grants, or government programs. Selling your way to breakeven is a positive approach to righting your operations. Cutting costs is the obverse.

As companies embark on these alternatives, our guidance has been to expect current conditions to persist for 12-24 months. We are happy to be wrong, and have the duration be shorter, but plan for the worst.

Maintain control of the business by being proactive. Get your metrics into the acceptable ranges. Be prepared to make difficult decisions. Getting through the cooler period is the objective. Options will avail themselves once through the cold front.

– Rob, Dave, and the Information VP Team