Should Founders Still Raise in an Economic Downturn?
Jason Calacanis (@jason), angel investor in many category-defining companies, including Uber, Thumbtack, Wealthfront, Robinhood, and Calm, says you absolutely should. Jason sat down with Steve Barsh, Managing Partner of Dreamit, to give founders relevant downturn strategies. Having been at the forefront of the dot-com boom, 9/11, and the financial crisis of 2008, Jason knows what it takes to survive this downturn. In fact, Jason started investing during the financial crisis. As he says in the episode, “survival is key in a challenging time.” Jason answers critical questions for founders, including:
How can your company ensure survival?
Should you still raise during this downturn? If so, where should you focus?
How will this downturn impact valuations and deal terms?
How to survive now so you can thrive later
When Jason speaks with founders, he looks for specific qualities that indicate they have what it takes to survive. First, be honest and informed about the state of your business. Get as much data and information as possible to build a holistic understanding of it. Look at your revenue and think through ways to improve it. In the episode, Steve and Jason suggest the possibility of using services as an alternative revenue stream. If a customer is not looking to adopt your product, there may still be consulting work your team can do. Again, survival is key. Runway is a crucial indicator of survival that signifies your company’s future financial ability to sustain operations. How much runway should you have? According to Jason, you’ll need to have 18 months worth. If you cannot sustain operations for 18 months, cut your burn rate so you can extend your runway. Investors want to see you’re able to remain lean and adapt to changing economic circumstances. Your primary job as a founder is to save the business. Extending runway will require you to make tough decisions, but those changes are necessary to ensure survival. As Jason puts it, “it is better to land the plane in the Hudson than to crash.”
Should you still raise during a downturn?
Yes. As Jason says, “if you have a good business, it is never a bad time to raise.” Founders planning near-term fundraising rounds need to understand that an economic downturn is one of the most difficult times to pitch to investors. So, if you even attempt to do so now, investors will know you are ambitious. They’ll put you in the bucket of people who want to win. What do investors like Jason want to see from founders? Resiliency. Raising in an economic downturn will prove that you are working on something you’re willing to fight for.
Where should you focus if you’re trying to raise right now?
Obviously, investors will be more conservative in this economic climate. Now is not the time to spin or inflate your early numbers. Jason says angels “know these numbers won’t be predictable, that’s why we want to help you.” You should be honest with your employees about the state of your business, and the same goes for investors. Focus on the customers who are actually using your product. Now more than ever, investors will not suspend disbelief. They will focus on reality. Even then, they may still be skeptical. Jason believes the best founders are those who will candidly discuss these topics with him. If the investors don’t seem to be on board at the end of your pitch, ask them what milestones they would like to see you achieve to get them to write you a check in the future. Steve echoed this trial close approach, alluding to a meeting where one founder asked upfront, “What would I need to say to get you to write a check?” The investors gave him objectives to meet, the founder came back later having met them, and both parties agreed to a deal. That’s exactly the level of resiliency founders need to demonstrate.
How will this downturn impact valuations and deal terms?
Jason invested in companies like Uber and Calm during the financial crisis. At that time, these companies had products in market and valuations around $4-5 million. Jason expects to see similar valuation trends during this downturn. In general, companies can expect to come out of accelerators at half the valuation they would otherwise have in favorable economic environments. Startups will most likely have to raise under unfavorable circumstances for a while, but the key is to persevere despite challenging market dynamics.
Takeaways
Survival is key. Wartime CEOs have tough decisions ahead but their primary goal is survival in an economic downturn.
If you have a good business, it is never a bad time to raise.
When you’re raising, be honest about the state of the business and engage in a candid dialogue with investors.
Expect your valuation to be half what it would be otherwise. Founders will have to give up more equity than they otherwise would in order to close a deal.
Jason ends the episode by reminding us that he has lived through multiple downturns in his career. In his experience, the one truth that endures is that things always go back to normal. Startups that survive will emerge stronger because of their resiliency. Certain sectors may heat up that would not have otherwise. However, the main takeaway is that although times are tough, founders must persevere. Jason reminds us, “the people who persevere sometimes are the people who actually figure it out.”
By Alana Hill, Securetech Associate at Dreamit Ventures
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