Survival of the quickest: Venture capitalists share advice on the state of the economy

As if we haven’t endured enough in the last couple years a new beast rears its ugly head. Inflation in the United States hit a 40 year high in April, causing prices to skyrocket and the markets to go into a tailspin. The Federal Reserve responded by hiking interest rates 0.5 percentage points, the biggest spike in more than 20 years.

It is a rude awakening after the Federal Reserve slashed interest rates to almost zero to offset the effects of the COVID 19 pandemic. However, experts speculated the move would only delay an inevitable economic slowdown.

Making tough decisions in a turbulent market

For many companies, especially startups, there is now a quick shift to stem cash flow. That means layoffs, restructuring, and rethinking operations. For a deep dive into the sequence of events and what we can learn from past recessions, check out this YouTube video from Craft Ventures on operating during a downturn.

So how does a startup survive when new funding will be scarce? It’s all about thinking fast on your feet.

“From our view, the companies that will survive and thrive during this time are those that take fast action, get really disciplined about their operations then rebuild” says Bryan Murray, Partner and COO at Craft Ventures, a venture capital firm.

Murray and Allen Miller, principal at Oak HC/FT, both venture capitalists, shared four top tips for navigating the slag.

1. Extend your runway

The past few years have been about growth but now it’s time to get back to the business fundamentals, says Miller. That means holding on to cash whenever possible and getting focused.

“You have to grow but you have to do it in a sustainable way… I think people are willing to take a little bit less growth if it means it comes with more efficient growth and less burn and more healthy unit economics,” he says.

2. Earn your way to headcount expansion

The mentality of company building is changing.

The model for hiring among startups has been to fundraise and then inflate your team. Murray says this new reality is a wake up call to shift that mindset.

“Grow based on the progress you’re making, such as you’re seeing your market penetration increase that should unlock expansion in headcount. But we shouldn’t be growing ahead of progress.”

3. Double down on doing more with less

Miller has two key words for companies when it comes to refocusing: scrappiness and creativity.

He says now is the time to be thoughtful about how money is being spent and come up with new ideas to bolster the business.

“These are the moments where market leaders… will extend their lead, right? I think if we are scrappy, if we are creative, it’s a great time to double down and do what we do best”.

4. Key sales metrics matter

Murray and Miller say there are a few efficiency metrics to watch right now. Numbers that are just good discipline for running a business: the magic number and attainment.

The magic number is how much you’re spending on sales and marketing to generate new Annual Recurring Revenue (ARR). Attainment refers to how sales and marketing teams are performing against their goals.

“Attainment, I view it less of a heroic endeavor…. I view it more as a function of market demand. So if you see your attainment drop across the sales team that means you should pause hiring or something is not working with your marketing or distribution.” says Murray.

The bottom line during tough economic times

The venture capital attitude is changing rapidly, as rapidly as the market. There’s a push for more disciplined investing. The big question is will this trend stick around when the market does start to rebound?

“I’d like to say yes but history is not on our side.” says Miller. He points out that venture capital spending tends to follow market trends but that being too conservative can often mean missing out on big opportunities.

Murray adds that it’s all about following the trains of money supply and being patient. “We are taking it week by week, day by day and just observing what’s happening in the market and trying to adjust accordingly,” he says.