Many startup founders have asked us, as investors and accelerators, the path to weathering this economic downturn. We curated a list of US and Canadian seasoned investors to convey their perspectives on the state of the market and what this means for valuations, resource allocation and raising money during this precarious period.
By Taylor McAuliffe and Hessie Jones
This article is part 2 of 3 in our ‘Investor Advice in a Down Economy’ series.
Slowdowns do not necessarily mean the investor will change their investment strategy. In fact, this may be a good time to invest. Founders should remain customer obsessed.
Julianne Zimmerman, Managing Director, Reinventure Captial, which invests in US-based companies led and controlled by BIPoC and/or female founders of all identities, maintains this current environment has not changed the way they are investing:
“Reinventure came into this downturn with an investment strategy that was already essentially orthogonal to most of our venture capital peers. We invest exclusively in US-based companies that are led and controlled by BIPoC and/or female founders at breakeven and poised to grow profitably. So, we are already taking a very different stance in our identification of opportunity in the way we think about value and risk and the way that we identify promising founder teams and their companies. And we are not changing our strategy, our criteria, our approach, or our methodology in response to the shift in the economy. What we are doing is looking with the founders at their respective market conditions and talking with them about how they are thinking about their customers, their suppliers, and their strategic partners, and how they are thinking about the health and viability of those networks, because no company stands by itself.”
Neeraj Jain, General Partner of MATR Ventures, a seed stage fund which invests in underestimated founders: women, Black, Indigenous, People of Color (BIPoC), LGBTQ2S, and Neuro-diverse communities, does not see this time as changing the investment criteria.
“This downturn was expected, and the economy will recover again. We should not panic as it is a normal course of our economic system. It also does not mean that VCs will not invest – instead, they may just look at deals with more scrutiny. But I will still look at the same criteria: whether it is traction, a good business plan and business model, the team – all those things are important to me. And the bar might be just a little bit higher to get funded… However, as an investor I do feel there may be more opportunities to see deals that may have been gobbled up before I had a chance to see them.”
Andrew Opala, Founder and Managing Partner at Preference Capital, like Zimmerman, illustrates the importance of the customer, which is part of Preference Capital’s Investment thesis:
“The only thing that would change with us [at Preference Capital] is being critical when it comes to the founder’s customer. So, when an investee says, ‘I have this great customer,’ we used to ask for their name, looked on LinkedIn and that was good enough for us. Now we are investigating more. One of our GPs is flying to Kentucky to interview the customer of one of our investees. That is how worried we are because we will pay for a $2000 plane ride to save us $500k and a bad decision. So, we are being extremely critical of the customer story because there must be a clearly defined segment we can measure and put a number on. I can go into LinkedIn to find out how many of these “chief innovation roles,” for example, there are to get to market size and scrutinize the company on the revenue they are going to bring in every year from this market. So, in choosing companies, we make sure we interview the customer(s) they promised to bring to the table is real.”
Pre-seed investor, founding partner of Hannah Grey VC, and Cofounder of Women in VC, Jessica Peltz-Zatulove, considers this time the best to invest. Like Opala, being aligned with the market is critical.
“This is when creativity is at an all-time high. This is when you start to see a lot of the challenges, but resilience really materializes for a lot of founders that are ready to start new business, so we are not slowing down our pacing. We plan to continue to invest and execute our strategy as normal. We are looking forward to the valuations coming back down to reality at the pre-seed stage. We are more price sensitive and the last 12 to 24 months of deciding to invest or not was the state of the market. Funds deployed too quickly and are sitting with portfolios that are heavily overvalued right now. For us, it is just being more disciplined on valuation and putting an even bigger emphasis on team. The founding team needs to be nimble, open-minded and be a student of the market with a healthy obsession with the customer.”
We have witnessed a tech market seeped in panic, layoffs, and shutdowns. Founders should lead through a crisis with empathy, responsibility and shed the “fire fast, hire fat” startup mentality.
Gayatri Sarkar, founder of Advaita Capital, a firm which invests in growth-stage technology startups and is focused on celebrating diversity and championing the voices of women and diverse GPs and LPs Sarkar, realizes that walking in the shoes of founders who must make critical decisions that impact the team, and the growth of the company, is not an enviable position:
“Founders, especially at a time of high uncertainty, need to be responsible, and empathetic – understanding that their employees may be breadwinners of their families. Then again, in a startup world where you fire fast and hire fat, the expectation for stability is less likely. Being a founder that needs to make these types of decisions during a recession-driven economy or where we are very much tied to our bottom line is tough. It will be interesting to watch, but I have hope that a lot of founders will bend towards reducing salaries of senior management and, among staff to stave off layoffs, while driving meaningful impact and product led growth.”
For Alaric Aloor, General Partner at MATR Ventures, and CEO of Archon Security, a 9-year-old company with 19 employees, human capital is the most important to a business, even during a downturn. He alludes to this “fire fast, hire fat” mentality Sarkar introduced:
“When I talk to startups that I advise and they are looking to hire, I tell them to look for cultural fit. More importantly, are you going to be able to provide this person you are hiring with sustainable employment opportunities for growth over the long term. I am not talking to one year or two… but 5-10 years because as a founder and CEO, if that is your vision, you are going to be bringing on the right pieces to fit NOT because you received some funding. I advise against this because it is a bad model for growth without actually selling… So, when I advise startup founders about hiring, it is to avoid layoffs that we are now seeing across industry i.e., explosive hiring that companies have done with no consequence of looking at the long term. When you are a company that wants to be stable and in the long game you must have sustainable hiring processes and practices. Without that, the faster you go up, the faster you come down.”
Danielle Graham, Managing Partner of Phoenix Fire and Cofounder of The Firehood, an angel fund and network focused on women in technology, illustrates for founders the importance of aligning core activities to core milestones, but more importantly, effectively negotiating their worth if they are hitting those milestones:
“Be frugal. Be focused no matter how incredible your product is. Manage your activities to hit those milestones, leveraging early-stage opportunities that investors are expecting to warrant the next round. Companies doing well will continue to get funded. There is still capital in the market. It is getting those companies forward with 2x to 4x return before earlier investors or common shareholders get anything, so they do not want to be at the bottom of that waterfall when you have heavy liquidation preferences. You need to be negotiating that lever and fight harder on your deal terms and rights. If you are doing well, you have product market fit and you are hitting your milestones then you should have less to worry about because you are building a viable company.”
Similarly, Peltz-Zatulove of Hannah Gray VC defines the need for empathy with a dose of reality.
“I would look to the founding team to redefine what those KPIs and milestones are for the next 18 months. Make sure you have a clear idea about what you need to accomplish to get to those milestones. With a fresh set of eyes think about the budget and team you need to accomplish those goals and, in the road ahead.”
Shirley Speakman, Senior Partner, Cycle Capital, an impact investment company focusing on cleantech, expresses the importance of transparency when a founder communicates with employees.
“If you try to hide things from the employees or gloss over it, people will see through it. And inevitably, if you must raise capital and you need to reduce your valuation, this will scare employees, and will trigger perceptions of the company being worth less or heading into a downward spiral. So, again, managing the cash without cutting bone is an important part of giving employees confidence that you can manage through this time that’s ahead of us.”
Zimmerman, Reinventure Capital, agrees with this prevailing view of rigorous cash management:
“For founders who can either alter the product or service offerings so that you can generate revenues in excess of costs if you haven’t been, or bring your revenues, at least in line with your costs if you haven’t been, I strongly encourage you to do so. So, if you’ve been burning hard, hard, hard, and you are concerned about conserving your ability to make decisions, focus on bringing your revenues in line with your expenses. That may mean reducing your burn rate. But it may mean offering new products or services or offering new tiers or offering new means or even reaching new customers to engage with your product or service — strengthening your customer base bodes better for resilience and future opportunities for growth than simply cutting back. For founders who are already operating at or above breakeven, I would say really work to understand exactly what the drivers of your profitability are and double down on those.”
Jain, MATR Ventures, emphasizes the importance of team:
“They should involve the team and planning. How are we going to conserve cash? Involving the team in that is important. You do not want to create fear. You certainly do not want your good people to leave. So, you know, they need to feel confident that you have the right plan.”
The original version of this post first appeared on Forbes.
Stay Tuned for Part III of our series.
Altitude Accelerator is committed to commercializing impactful technology in Southern Ontario. We offer a series of programs to startups to help them grow faster, stronger, commercialize their products, and get to market.
Learn more about how Altitude Accelerator works with founders:
Shirley Speakman, of Cycle Capital, recently hosted a session for our Investor Readiness program about valuation, guiding founders through the fundamentals of data room creation and management, how it ties to valuation, and the importance of cap table formation in all support of getting a good deal completed. Speakman is one of our more than 100 expert industry, academic, and government partners and advisors that work to help start-ups in cleantech, advanced manufacturing, internet of things (IoT), hardware, software, and life sciences grow faster, stronger, commercialize their products, and get to market. She also sits on the Board of Directors at Altitude Accelerator.
Andrew Opala sits as Chairman of the Board at Altitude Accelerator and is the Founder and CEO of Preference Capital. Andrew also hosted a session for our Investor Readiness program on Finance Fundamentals. Andrew is a seasoned entrepreneur having successfully exited from companies such as MGI Software, iseemedia and Voxavox.
Hessie Jones is a strategist, venture partner, advocating for human-centred AI, data privacy, and ethical distribution of AI. She is currently the Innovations Manager at Altitude Accelerator.
Taylor McAuliffe is a 4th year student at McGill University studying a major in Industrial Relations and double minor in Economics and Communications. Her work experience centres around content creation and copywriting. She currently works as the Interactive Media Writer Intern at Altitude Accelerator.