Every era is different, but here are some tips for our new normal
I’ve looked at tech from both sides now (h/t Joni Mitchell), as a three-time entrepreneur and as a venture capitalist during two recessions.
On the startup side, my first company, VXtreme, was acquired by Microsoft and became the internet media streaming platform. My second experience was the rocket ship heading for an IPO and the ensuing nosedive in appreciation that characterized so many startups in the dotcom era.
My third startup had only been on the market for a year when the internet bubble burst and had not yet found a 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 capitalist, I have invested in more than 60 companies, and while many have gone public or been acquired, the journey has involved pivots, near-death experiences and navigating the 2008/2009 downturn.
Today, while people are throwing around scary words like pile up, structure, rattles, illiquid portfolios and fund liquidation, I really empathize with company founders who have struggled to raise capital, have seen their valuations plummet and make tough survival decisions.
Every era is different, but here are some tips for our new normal:
When raising money, research your investor carefully
At a time of contraction, companies with near-end-of-life funds will find themselves severely restricted and may not have enough follow-up capital allocated to their existing investments.
Reserve management can become a problem and existing investors will not be able to pay their pro-rated amounts, especially if you do internal rounds or bridging extensions. So, as part of your investor evaluation, you should ask which fund they are investing in, how far along they are in investing, and how much they have in reserves for future rounds.
This will help you ensure they can continue to support your future capital needs.
Be creative when tightening the belt
When capital is scarce, you must be prepared to kill your darlings so that you can extend your runway.
At Rivio, my third startup as founder, we came up with a zero-based budget plan after the dotcom crisis that assumed we wouldn’t have access to future capital. We then drastically reduced product features, reconsidered our go-to-market strategy, and set the business straight.