5 Steps to Surviving Venture Capital’s Deep Freeze

In recent decades, the venture capital (VC) industry has experienced significant emotional swings. What should business leaders do if VCs tell them to cut costs before the next round of capital? Read on for advice from a CEO whose startup just raised $50 million in the middle of the present day VC deep freezing

The venture capital roller coaster

When the economy grows and the IPO market starts to light up, VCs are possessed by a severe case of Fear of Missing Out (FOMO). FOMO drives VCs to tell their portfolio companies to spend all the money they need to grow at more than 100 percent per year as they sprint into the IPO market.

Every few years, FOMO quickly changes to Fear of Losing Everything (FOLE). That certainly happened in a big way when the dotcom bubble burst and during the financial crisis of 2008. It’s easy to see ahead of time — it’s usually preceded by a burst of IPOs and a rising NASDAQ — and that’s what happened. in 1999.

Last year, I expected FOMO to move quickly to FOLE due to the rapid growth of Special Purpose Acquisition Companies (SPACs) and record levels of VC investment. Little did I know that the Federal Reserve’s decision to launch a campaign of rate hikes would bring about the emotional turnaround.

To be sure, it was more complicated than that. as the New York Times reported, [the change in VC attitudes] is due to the end of a “decade-long run of low interest rates, the war in Ukraine” [that is] causing unpredictable macroeconomic ripples; and big tech companies — like Amazon and Netflix — whose shares are faltering,”

VCs are increasingly telling their money-guzzling portfolio companies not to expect new scrutiny. In the first quarter, US venture capital funding fell 8 percent to $71 billion; more than 55 tech companies have announced or closed layoffs since the beginning of the year, compared to 25 around this time last year; and on May 4, IPOs were 80 percent lower than the year before.

The Fatal Risk of Skipping the Second Stage of Scaling

For startup founders, the problem can be explained by looking at the four stages of scaling I wrote about in my 2019 book, Scaling your startup

  1. Win your first customers. When a startup finds a match between customer needs and the product they are developing, it can win customers
  2. Build a scalable business model. Before taking on significant amounts of capital to grow rapidly, the startup must redesign processes — such as sales, product development, and customer service — so that the startup has a clear path to profitability as it grows.
  3. Sprint to liquidity. The startup is accepting significant amounts of capital that it spends on sales, marketing, and product development so it can quickly grow to over $100 million in revenue — allowing it to go public.
  4. Running the marathon. The startup is going public and must support revenue growth of more than 20 percent, so that the share price continues to rise.

At the time of writing the book, most startups obeyed the demands of the FOMO-infused VCs to spend what was needed to grow quickly. Basically, they skipped the second phase of scaling.

Now that FOLE is the emotion-du-jour, VCs are demanding that startups do the stage they previously told them to skip. Listed companies that never completed the second phase, such as Uber, are now trying to do so.

Lessons From Startups That Just Raised $50 Million

San Francisco-based Mutiny, a four-year-old, 49-employee operator of a website personalization platform to help businesses drive sales, raised $50 million in April at a back-end valuation of $615 million, according to pitch book

Mutiny’s investors wanted to invest because their portfolio company’s CEOs said Mutiny’s product helped them grow faster.

How’s that? Co-founder and CEO Jaleh Rezaei — whose two Stanford degrees include an MBA — told me in a May 11 interview, “Customizing a company’s website based on what a potential customer is looking for increased the conversion rate. from one customer by 60% (where 10% is huge). We’re reducing wasted marketing spend from $19 of the $20 spent to $18, allowing businesses to increase revenue by 50 to 100 percent.”

Rezaei said Mutiny had little trouble raising capital because it passes five tests:

  • Solve a big problem
  • Target a large market
  • Make the customer much more successful
  • Build a culture that attracts the best people and helps them realize their potential
  • Sharpen your unit economy – for example, complete the second phase of scaling before taking on large amounts of capital

Do these five things and you just might survive the VC freezer.

The opinions expressed here by columnists are their own, not’s.

Shreya Christina
Shreya has been with for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider team, Shreya seeks to understand an audience before creating memorable, persuasive copy.

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