Nobody likes a good drama like the tech industry. No wonder WeWork or Theranos were more successful as podcasts, books and TV series than actual startups.
For the past six months, VCs have been piling on with their opinions about the latest drama: the tech slowdown and rise in inflation. Much of their advice feels jarring to founders: after being told to grow at all costs, we're now being drowned by a litany of content telling us to to cut costs.
So here’s exactly why the VC advice to date isn’t hitting the mark — and the actual help that founders would appreciate.
Lots of advice, not a lot of tactics… except going for another fundraise
The VC recommendations to date can be summarised as: "Make sure you have three to four years of runway.”
But unless your startup raised before the downturn — in which case you don’t need additional advice — these only defocus founders and nudge them towards raising more capital at unfavourable conditions. In other words, founders are being told to consume more of the only product a VC sells: money.
Are VCs acting in good faith when dispensing counsel? Probably — after all, their fortunes are also made by the fortunes of their portfolio companies. But this does not mean they are right.
Is it in their interest to advise founders to raise again? Definitely, as they can deploy capital at lower valuations when some founders weren’t thinking of raising yet.
What about layoffs? That’s the other solution that some VCs have recommended as a way for startups to keep cash in the bank. Reducing payroll definitely helps extend runway — the amount of cash you’ve got left.
However, I wish there was half as much actionable and nuanced advice for actually how to conduct layoffs and support for founders and teams with the mental toll this takes as there are “macro analyses” of the downturn and why we’re seeing inflation.
Founders need to focus on what matters, boring business fundamentals
Boring — but important — talk of business fundamentals doesn’t get a lot of traction on Tech Twitter. However, that’s all founders need at the moment, not another VC email or alarming predictions. A very few exceptions aside, we’re already overcoming hardship after hardship on a daily basis to build something new. We’re not novices about overcoming challenges.
That’s why I’m surprised by the scarcity of knowledge or frameworks shared that empower us to actually improve our unit economics in this new context. Indeed, having more runway with clunky unit economics is nothing more than fighting a losing battle.
So if you are a VC looking to “be helpful” to founders, here are three areas we actually need actionable insights on:
Controlling user acquisition costs
VC money has been thrown at ad platforms to grow at all costs for the past years. How should startups deal with their ad budgets now? Cutting all ad campaigns can severely damage growth, especially if ads have been the main acquisition channel, and startups need to keep growing.
On the other hand, a lot of advertisers have reduced their budget, which means there’s less competition. This might also result in an opportunity for user growth at a reduced cost. It’s not black or white — which means it’s a tricky problem that founders would appreciate advice on.
Pricing
When capital was abundant, maximising monetisation was always a priority. That meant that generous free tiers or permanent promotions have been the norm for startup pricing. How should companies iterate on pricing to increase revenues while managing users’ expectations? A common thought is to switch to "usage-based pricing" — billing based on what the user consumes — but like all pricing decisions, that comes with a set of delicate implications.
Cash management
Improving cash management reduces the need for working capital — the money a company has for its day-to-day operations. A deficit of working capital could be even more fatal to startups in the current downturn if they fail to raise the next round in time, for instance.
Regarding “cash in”, how can startups collect what they are owed in a shorter time from their customers when they are themselves hit by the economic downturn? How can they make them switch to annual prepayments? To control “cash out”, what’s a good playbook to review all vendors' contracts, limit travels to essential ones, and announce hiring freezes without hitting team morale too hard?
So there you have it — now I’m just waiting for that VC “black swan” email I actually want to read.
Anh-Tho Chuong Degroote is CEO of Lago.
