To say that the current capital markets are challenging would be an understatement.
The tech ecosystem has come out of what can only be described as enormous orchestrated bubble, fuelled by
- endless printing of money during the pandemic, that ultimately led to
- high inflation,
- interest rate hikes, and
- massive job shedding.
Could it have been avoided with foresight and measured fiscal policy? Sure but let’s not let a good fiscal management in the way of government elected terms.
But what does this mean for our startup sector? Well if you raised during the bubble well done, hopefully you raised enough to give you another 24-30 mths of runway. If you didn’t, and you find yourself going to the well again in the next 12 months, be prepared for down-rounds. Valuations have dropped, from Meta and Stipe through to startups.
Is it all bad? Not necessarily, it’s a normalisation of the market and valuations but I do worry about the 2021 and 2022 investment vintages, returns are going to be a real challenge for them.
Cash is king
So what now? What do VCs like Mandalay Venture Partners look for in a deal? Well for starters you better be sure to be raising for 18 months or more, preferably 24 to see you through the current period.
Austerity means slowing growth, managing burn and understanding the all important ‘burn multiple’.
Growth for growth sake is no longer the metric, it’s now efficiency of growth that will make you stand out.
If you’re a founder you best get your head around the concept of ‘burn multiple’ really fast. Investors will be looking at your spend (burn) vs your revenue and doing back-of-the-napkin assessments to ascertain how sustainable your business is going to be.
the Burn Multiple – the inverted Bessemer ratio shared by David Sacks
Burn Multiple = Net Burn / Net New ARR
In other words, how much is the startup burning in order to generate each incremental dollar of ARR?
The higher the Burn Multiple, the more the startup is burning to achieve each unit of growth.
The lower the Burn Multiple, the more efficient the growth is.
For venture-stage startups, these are reasonably good rules of thumb
So when raising Seed to Series-A and beyond, consider the following:
👍🏼18 months runway is ok, 24 months is better
👍🏼cap salaries and remunerate via ESOPs that can reduce burn
👍🏼if new markets are exceeding a burn multiple of 3-4, reconsider for now
👍🏼managed growth is ok, cash is king
👍🏼mark to market regularly
This is not the environment you want to be raising in twice in the same 18 months. Money is going to get tighter as interest rates continue to rise to curb inflation. It’s going to be hard to attract dry powder as venture returns become less attractive with other capital allocation assets.
Learn about the concept of burn multiples in austere times (see attached article). Great opportunities will still be funded but we are no longer in a ‘blitz-scale’ era; your growth and market strategies need to reflect that.
A good investor will help navigate these waters. We don’t expect founders to understand all the underlying macro economic issues, but it is our role to help you chart a sustainable path forward.
Don’t be afraid to ask questions, test assumptions or reach out as it’s the best way for us to get through this together.
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