The media has been full of stories of start-ups facing a nuclear winter, when only a few months back we were staring at an unending, golden haloed dawn of innovation and entrepreneurship. As is the case with life, the wheel turns full circle and the truth is largely somewhere in the middle. Put it down to the old human fallacy of overestimating the short term and underestimating the long term.
So let’s step back and look at some of the dynamics at play here. Of late, the US public markets have returned $ 1.5 trillion to investors in dividends and buy-backs. Out of this, about $ 50 billion flowed into the VC ecosystem and the rest in other investment vehicles like bonds, pension funds, mutual funds etc.
The Fed in all likelihood is set to increase the interest rate in December and the money invested in the emerging markets may flow back to the US and some of it will again find its way into the VC world.
The investors in public markets expect companies to stay very short term focused – witness the shenanigans of shareholder activists, reluctance of listed companies to invest for the long term, extreme caution in buying for technology or strategy and the avalanche of money being returned to shareholders.
But at the same time they expect private companies to focus on the long term. So the same set of actors who have pushed the listed companies in one direction, are pumping in money in the late stage/growth stage of startups with a clear understanding that the private companies will stay away from the public markets and build scale. This feeds into the theme of startups staying private longer and longer.
Once the screws start getting tightened, like Fidelity writing down its Snapchat investment by 25%, there will be a whole bunch that will go bust – the subprime unicorns, if you will. But there will be an entire portfolio that will go on to be the next Facebooks, Googles and Amazons of the world.
What’s in store for the future?
One of 2 scenarios
1. Startups are forced to go public like in the case of Square at a discount to their last private valuation
The clogged up public markets get cranking again, but this will always be at the backdrop of the fear psychosis of 2000 and 2008 (at least initially), that still seems to be fresh in the minds of investors. There will have to be a few mega IPOs (Uber, AirBnB) that could finally get the ball rolling. But it’s anybody’s guess on the likelihood of them being either the Facebook kind of success or the sputtering Alibaba kind of IPO.
2. Status quo continues
Money keeps flowing to the startups in the way it has over the last few years, but it’s certainly going to be even more discriminating, more inquisitive and more demanding; at least for the foreseeable future – till the floodgates open in the next inexorable cycle.
So given that winter is here, what can you do to stay afloat for the upcoming Indian Summer?
Get a fix on your burn ASAP, both from the balance sheet (the amount of cash you have) and the income statement (how much of that cash you can spend) perspective.
There’s good burn and a bad burn, make sure you focus on the former. Good burn goes towards creating substantial value for customers, employees and investors. Bad burn focuses on vanity office digs, full page adverts and paid articles through PR agencies boasting about your latest exaggerated fund-raise or bad mouthing a rival. It’s time to make a choice while you still can.
The general rule of thumb to go by is that if you have about 18-24 months of capital you should be well placed to see yourself through till the next round of funding on terms that a startup with strong growth should command.
If the cash balance is less than 18 months and fund-raise has struck a soft patch than you are better off trimming costs with a hatchet.
At the same time you need to start a conversation with your investors, in the likely scenario of you not finding new investors – will the current lot stick by you, on what terms and what is the maximum amount of burn they are comfortable with.
Startups are a high-wire act anyway and the successful one’s manage all the critical aspects well. But in times when the so-called free money starts disappearing, triage becomes the order of the day.