Surviving the Biblical Summer of ‘22
The Biblical summer of 2022, with its war, pestilence, food shortages, and a plague of financial difficulties impacts startups of all types.
Weak companies that consume cash may well not survive this hot summer. But even the strongest companies will feel the burn.
A number of our most successful portfolio companies have shifted the tone of their latest updates from talk of growth and dominance to sober discussions of cost containment and endurance. One company, worth well over $100M, has announced it is unlikely to make this year’s growth targets, a first-ever for them, and is considering team reduction for the first time as well. Another company, which grew its revenue 65X last year (yes, that is X, not percent) and which has a strong interest in its Series C, still dropped valuation expectations for that round by 30%.
A CEO who has gone from strength to strength without a pause since the day we invested in his company asked for advice about how best to respond to this challenging summer. Here is what I told him:
It’s great that you have 20 months of cash in the bank. Treat it as a treasure.
Opinions are all over the place about whether we are entering a period of long-term inflation and dislocation, or even stagflation, or just a big bump in the road that we will get over later this year.
What is broadly accepted is that investment will be perturbed through this year. So, anyone who can avoid raising money this year, should. The valuations, even for strong companies, will be muted, and the terms may swing heavily toward the investor side.
The second likely short-term effect here will be a shift by development stage investors away from exuberant growth valuation toward valuations derived from fundamentals. So, unit economics are likely to be the drivers for rounds coming out of this year. Make sure those are buffed to a sheen. Your next raise valuation may well be your ‘“looking backward” revenue times traditional/conservative multiples for your category. For example: $15M x 5X = $75M valuation. If you need a $300M valuation on that multiple you would need $60M in revenue when you raise. Work those dials to determine when you can get an up round based on your fundamentals.
Another big consideration is how to become much more strategic about exits. If public markets are infarcted, only companies with remarkable traditional economics will make it out. Can you be one of those companies? If not, then the exit has to be strategic acquisition, and you need to begin thinking early about who that might be, on what basis, and start developing a relationship there.
The greatest value through this period will be profit. Profit=time. Profit=proof of market/customer support. Profit=demonstration of effective management. So, from my perspective, this is a period to weigh profit more heavily than absolute growth and to work toward a balanced growth-profit story as the basis for your next raise.
Hard times like these are when funds and founders find out what they are made of. Be one of the survivors.
By Managing Partner Mike Edelhart