Don’t panic, startups: Advice from veteran VCs who weathered the dot-com bust

There’s always prayer.
There’s always prayer.
Image: AP Photo/Mark Schiefelbein
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It has been an erratic week for the global markets, but should startups be concerned?

Depends who you ask.

“Worrying about the stock market at any moment in time is not a good use of an entrepreneur’s time,” Bryan Stolle, a general partner at the venture capital firm Mohr Davidow Ventures, tells Quartz.

But Arvind Gupta of SOSVentures believes it’s time for startups to take a cold, hard look at their financials—just in case. “If the stock market stays down—which is a big if—I think you’ll see many of these unicorns not make it to IPO and die ugly, public, messy deaths.”

Well, that’s reassuring.

The truth is no one really knows what to expect. But since many of today’s venture capitalists weathered the first dot-com boom and bust, they offered up some wise words for current entrepreneurs. Sometimes the investors are in full alignment, and sometimes they differ fundamentally—so as with all advice, take from it what you will.

Calm down

“What you don’t do is you don’t suddenly make a change,” says Aaref Hilaly, a partner at Sequoia Capital. “Whatever the situation in the markets, we always encourage our companies to focus on the viability of the business model, and the path to profitability is always a consideration.”

Gupta believes similarly: “In the short term, absolutely nothing should change. It’s business as usual.”

Back to basics

All the investors we spoke with emphasized that companies should—at the very least—evaluate their revenue and spending.

“I definitely think it’s a time to reassess where you’re at,” says Patricia Nakache, a partner at Trinity Ventures. “My advice is to make that assessment now and try to be clear-eyed about it, and don’t be in denial. That’s where you can run into trouble.”

Money will keep flowing

“Think about it: interest rates can’t get any lower,” explains Maha Ibrahim of Canaan Partners. “The fed can’t use interest rates to stimulate the market, so when people are looking for growth and for a bigger return on their investments than what they get in bonds or treasuries or cash, they’re going to need to put their money in a big way into public and private equity.”

So keep working on raising it. “Get capital when you can, but be really cognizant of that capital, and make sure it lasts,” says Ravi Viswanathan, a general partner at New Enterprise Associates.

But investors will probably be pickier

“By and large, we have seen folks get a little more measured in terms of throwing money out there,” adds Viswanathan.

As a result, it might not be enough just to demonstrate growth. Investors will want to see viable paths to profitability.

“Investors will look beyond the revenue momentum slide that shows things going up to the right,” warns Nakache. “Let’s peel back the onion: What are the costs to deliver the service, and how frequently do consumers need it? How important is it to be a truly on-demand service? I think there’ll be a lot more critical thinking around those dimensions.”

Or, maybe not.

Stolle says the most important metric the tech industry remains growth. “At the end of the day, you get paid to grow, and those periods when people kind of shift their focus to profitability historically have been very short lived, and they go back to focus on growth.”

Startups might have to pull back on their spending…

…on lavish perks

“As things become tighter and more competitive, and runways become harder to come by and harder to hang on to, you’ll see smart companies extend their runways by buckling down on perks,” says Gupta. “Because talent is not there for the free lunch, talent is there for the promise of delivering exponential value to customers, which they’ll get a return on.”

…to gain market share

“I think they need to abandon spending on market share at all cost,” says Joe Horowitz, managing general partner at Icon Ventures. “I think the notion you have to spend faster than anyone else to achieve market dominance becomes less compelling when capital is more limited in its availability.”

…or perhaps not at all

“I don’t think in light of recent events there will be companies cutting back across the board,” says Hilaly. “I think that will be an overreaction based on what we know right now.”

Valuations will likely deflate

The tech industry likely hit peak unicorn in the second quarter, when a record number of startups entered the billion-dollar club. But just about every investor agrees that if the markets stay in a rut, those tall valuations will fall.

“The capital is still there,” says Ibrahim. “What may happen is valuations may come down.”

Tim Wilson, managing director at Artiman Ventures, echoes a similar sentiment: “We’re not quite there yet, but if world events or an economy like this starts to get very shaky…then valuations will be under pressure, no doubt in my mind.”

And that’s OK

“The only thing that matters is growing the company ultimately to an exit,” says Ibrahim, “and exiting is the ultimate measuring stick of value, not necessarily these intra-milestones that the private markets are putting on them,”

Not to mention, “they should have been falling anyway,” Gupta adds. “Those valuations were simply a result of the system.”

But declining valuations could also spell trouble, as startups fail to convince investors they’re worth what they last negotiated. “It gets really painful if you raise at a very high valuation, and you can’t jump over the next valuation bar in fundraising,” says Stolle. “That’ll cost a lot more than taking the lower valuation the time before.”

The market fluctuations might even be a good thing (if they’re temporary)

“It’s healthy longer term,” says Viswanathan. “It sort of let the air out of the tires.”

And Gupta believes that ”for smart, good CEOs, a crash should almost be welcomed in the sense it forces many weak hands out, and the signal-to-noise ratio gets a little better.”

The key to survival

We’ll leave you with these parting words from Wilson: “If you have a boatload of money and ride it out, you’ll survive at the other end.”