20VC Why This Time Will Be Worse Than The Great Financial Crisis, Why DownRounds, Firesales and Shutdowns Will Happen & The Ultimate Startup Survival Guide; 7 Steps to Ensure Your Company Survives The Storm

Summary Notes


In a comprehensive discussion, Tom Lavero, a partner at IVP, and a Forbes Midas List investor, delves into the potential aftermath of the recent startup boom. Lavero predicts a harsher hangover than the Great Financial Crisis due to inflated valuations and companies raising funds pre-product based on hype. He advises entrepreneurs to raise capital well before a twelve-month runway ends, to avoid rushed fundraising and potential down rounds. Lavero also emphasizes the importance of decisive action, cutting costs while still funding core R&D, and the strategic hiring of experienced operators to navigate the downturn. He critiques the venture capital industry for being too hierarchical and slow to promote talent, suggesting a more equitable share of carry could improve diversity and dynamism in the sector.

Summary Notes

Pre-Financial Crisis Investment Climate

  • Prior to the great financial crisis, mortgages and LBOs (Leveraged Buyouts) were rampant, but venture investments were not as aggressive.
  • The current economic situation could lead to a more severe hangover for companies due to excessive valuations based on hype rather than product readiness.

"In the lead up to the great financial crisis, mortgages were going bananas, LBO's going bananas, investors and venture weren't to the same degree. This time it did."

The quote highlights that the investment climate prior to the financial crisis was marked by excessive activity in mortgages and LBOs, with a less pronounced focus on venture capital. This time, venture capital was also heavily involved, potentially leading to greater repercussions.

Tom LaVecchia's Background and Achievements

  • Tom LaVecchia's career in venture capital began after being inspired by the entrepreneurial spirit of his father and the rise of the internet.
  • Attended Stanford in 1999, discovered venture capital, and aimed to quickly enter the field.
  • Became a partner at IVP influenced by his mentor Eric Wesen and the reputation of IVP partners like Jules Maltz and Eric Liao.
  • Named to Forbes Midas List in 2021 due to successful investments.
  • Prior to IVP, Tom was a principal at RRE Ventures in New York.

"I went to Stanford in 1999, discovered venture. As they say, it was love at first sight, and wanted to find my fastest way into the career."

Tom LaVecchia's quote explains his introduction to venture capital during his time at Stanford and his immediate passion for the field, which set the course for his career.

Economic Context and Venture Capital

  • The economy is in good shape, and public market multiples are reasonable, making it a good time to start a company.
  • However, the investment frenzy of 2020 and 2021 is not expected to return, leading to profound implications for company operation.
  • Tom LaVecchia wrote a Twitter thread to provide actionable advice to entrepreneurs in light of these changes.

"The economy is actually in good shape. Public markets multiples are in a good spot. It's a wonderful time to start a company."

The quote emphasizes that despite the current economic stability and favorable conditions for starting a company, the excesses of the previous years are unlikely to recur, necessitating strategic adjustments for businesses.

Investment Valuations and Fundamentals

  • Valuations in 2020 and 2021 were often irrational, with due diligence sometimes rushed.
  • Current valuations are returning to a focus on business fundamentals such as quality of revenue, unit economics, founder quality, and exit potential.
  • The market correction is already underway, with the private market following the public market's return to normal multiples.

"In 20 or 21, it's all about the fundamentals. Is this a good business? What's the quality of revenue, the unit economics, the founder quality?"

This quote underscores the shift back to fundamental business metrics when assessing investment opportunities, moving away from the previous period's inflated valuations.

Potential for Downrounds

  • Downrounds are seen as damaging and are generally avoided by venture capitalists, but the current climate may necessitate them.
  • Some companies, especially those with valuations from 2021, may face downrounds as they seek new funding.
  • VCs may be reluctant to pursue downrounds, preferring clean, upward trajectories for their investments.

"I think this time we will look at what stripe has done. If you're telling me every company from 2021 is better than stripe, sure, there'll be zero down rounds, but if that's not the case, there may be some."

The quote suggests that not all companies will be able to avoid downrounds, especially when compared to high-performing companies like Stripe.

Startups' Cash Runway and Future Fundraising

  • Many startups raised significant funds in 2021, anticipating the need to raise again in 2023 or 2024.
  • Data at IVP indicates an increase in deal flow and potential downrounds, contradicting the notion that all startups have sufficient cash through 2025.
  • The private market is adjusting, with companies coming back to the market for funding.

"The data we're seeing coming across our desks, the data we're seeing at IVP suggests otherwise. We're seeing, I would call it a trickle, but like a noticeable uptick from Q four in deal flow."

Tom LaVecchia's comment reflects IVP's observations of increasing deal flow and the need for additional funding among startups, challenging the idea that all have extended their cash runway sufficiently.

The Fate of Highly Valued Startups

  • Startups with high valuations and significant cash may still struggle if they lack product-market fit or sustainable growth.
  • Some may become "zombie" companies, unable to attract new capital or grow effectively.
  • Investors may request their money back in some cases, although this is not common practice.

"What happens to them? At some point, you need growth to become a real company and not a zombie."

This quote addresses the challenges faced by highly valued startups that may have raised funds based on hype but lack the necessary growth and product-market fit to succeed long-term.

The Calm Before the Storm

  • The current period may seem calm, but a surge in companies seeking funding is anticipated towards the end of the year and into the next.
  • The influx of companies needing investment will force VCs to be selective, potentially leaving some startups without the necessary attention or funding.

"The way I back into the math says that there's a lot of companies that are going to be raising the end of this year and next year."

Tom LaVecchia's statement predicts a forthcoming period of heightened fundraising activity, which may lead to a more competitive and challenging environment for startups seeking investment.## Capital Raising Timing

  • Timing is crucial when raising capital; raising funds at the last second is discouraged.
  • Founders should proactively seek funding before it becomes urgent to avoid potential financial distress.

"Don't raise at the last second. Get out in front of it."

This quote emphasizes the importance of seeking investment proactively rather than waiting until the funds are critically needed, which could lead to rushed decisions and unfavorable terms.

Reserve Management in Venture Capital

  • In tougher economic times, venture capital firms must consider how much to invest to prevent portfolio companies from going out of business or suffering massive dilution.
  • The concept of "pay to play" is highlighted, where not contributing additional funds can significantly dilute previous investments.
  • Investors need to critically evaluate bridge rounds and their purposes.

"During good times, it's pretty easy because companies can raise capital... But all of a sudden it changes during the darker times where it's if I don't put money in, there's going to be the company's either going to go out of business or there'll be a pay to play and I lose basically all of my ownership."

This quote discusses the shift in investor mentality from maximizing returns during prosperous times to the defensive strategy of protecting existing investments in economic downturns.

Efficacy of Bridge Rounds

  • Bridge rounds are generally not seen as the best use of capital.
  • Successful bridge rounds are rare and often only delay inevitable outcomes.
  • The success of a bridge round may depend more on the inherent strength of the company rather than the financial maneuver itself.

"In general, they're not necessarily the best use of capital in terms of a bridge round... A good bridge rounds, at least six months."

This quote suggests that bridge rounds are typically a suboptimal investment and should provide a company with a minimum of six months of runway to be considered effective.

Venture Capital Investment Predictions

  • Predictions about market behavior are speculative but can be informed by patterns such as the timing of fundraising rounds.
  • Anticipation of a market downturn can influence investor behavior and fundraising strategies.

"My guess is July and August we start seeing a lot more businesses come to market... predictions are fun."

This quote predicts an increase in companies seeking investment in the mid-year months, indicating a strategic timing for fundraising ahead of a potential market downturn.

Impact of Economic Cycles on Startups and Venture Capital

  • The current economic cycle is expected to be more challenging than the Great Financial Crisis (GFC) due to higher valuations and more aggressive investment behaviors.
  • Startups may face down rounds, and venture capitalists may avoid such rounds due to psychological biases.
  • Founders must be proactive in managing capital and setting valuations to facilitate future fundraising.

"The hangover is going to be worse because you were pre product and you raised at 300 on a bunch of hype and now you're at a million ARR."

This quote highlights the consequences of startups raising funds at high valuations without substantial revenue, leading to difficult situations in subsequent fundraising efforts.

Employee Equity in High-Valuation Startups

  • Equity grants for employees joining billion-dollar startups in recent years may be underwater.
  • Boards and CEOs have the ability to restructure incentives to retain talent and provide upside potential.

"The initial equity grants could be underwater, but there's a couple of things going on... it is in the power of the board and the CEO to figure out how to incentivize people going forward."

This quote addresses the potential for employee equity to be worth less than expected and the responsibility of company leadership to adjust incentives to maintain employee motivation and retention.

Venture Capital Deployment Cadence

  • Venture capital firms are adjusting their investment pace in response to LP concerns and market conditions.
  • Rapid deployment of capital can strain LP resources and lead to pushback on future commitments.
  • Historical investment strategies emphasizing selectivity and careful deployment are being validated in the current market.

"The deployment cadence is probably the first thing, and that's already changed... I have to hit the brakes and I'm going to go back to that three year deployment cycle."

This quote explains that venture capital firms are slowing their investment pace to align with traditional deployment cycles, ensuring responsible capital management and alignment with LP expectations.

Valuation and Marking of Venture Books

  • Venture capital firms should have marked down their investments in the past year to reflect market realities.
  • LPs should be skeptical of funds that have not adjusted valuations in light of economic changes.

"Everybody should have done some sort of markdown in the past twelve months for their venture investments."

This quote suggests that responsible venture capital firms should acknowledge market downturns by adjusting the valuations of their portfolios, providing a more accurate reflection of current conditions.

New LP Interest in Venture Capital

  • There is potential for new LPs, such as European family offices and Middle Eastern investors, to enter the venture capital market.
  • Despite short-term challenges, the venture capital industry is expected to grow over the long term.

"Is there not a new wave of LP that actually is born in these generations or this kind of economic cycle that we can be hopeful of raising from?"

This quote posits that new LPs, attracted by the long-term prospects of the venture capital industry, may provide fresh sources of capital despite current market headwinds.

Early Stage Investment Dynamics

  • Despite market corrections, early-stage investment valuations remain strong.
  • The venture capital industry experiences a delayed reaction to public market corrections, with early-stage investments being the last to adjust.

"Are prices going to go in seed and series a back to 2011 levels where great companies were done at one and a half pre? No, not happening."

This quote indicates that while early-stage valuations may eventually adjust due to market corrections, they will not revert to the significantly lower levels seen in past economic cycles.

  • Secondary market activity may increase as liquidity becomes a priority for investors and startups.
  • While secondary market volumes may fluctuate, the trend towards liquidity and secondary transactions is expected to continue growing over time.

"I think secondary buying, though, tends to be hottest, probably at the worst times... But once again, in the longer run, are secondaries going to get bigger? Absolutely."

This quote acknowledges that secondary market activity may be driven by market highs but asserts that the overall trend towards increased liquidity and secondary transactions is a lasting change in the venture capital landscape.## Venture Capital Selling Strategies

  • Deciding when to sell is a complex and challenging aspect of venture capital.
  • Selling should not be about timing the market perfectly but about de-risking incrementally.
  • Consider the company's fundamentals and macroeconomic conditions when deciding to sell.
  • In 2021, due to perceived overvaluation, there was a strategic move to liquidate more assets.
  • Current market conditions may not necessitate a rush to sell, depending on individual company conviction.

"The key is you don't have to get it perfect. And so that means not trying to time things all at once and doing it in stages and derisking over time."

This quote emphasizes the importance of not attempting to time the market with precision but rather focusing on gradually reducing risk by selling in stages.

"If you really think companies overvalued and the market's overvalued, then you're going to have a bias to action and a bias to sell."

This quote suggests that perceptions of overvaluation should influence the decision to sell, leading to a proactive approach in liquidating positions.

Fundraising Timing for Founders

  • Founders should start considering raising funds when they have twelve months of runway left.
  • The fundraising process should be completed with at least six to seven months of runway remaining.
  • Going to market prematurely can be risky and lead to difficulties in subsequent fundraising efforts.
  • Founders should segment their investor outreach, approaching different investors in stages to avoid overwhelming the market.

"My rule of thumb, you should start raising by twelve months."

This quote provides a guideline for founders on when to initiate the fundraising process, emphasizing the importance of starting early.

"But don't start raising with six or seven. Be done by then."

This quote stresses the importance of completing the fundraising process well before the runway is critically low, to avoid financial distress.

Strategic Fundraising Approaches

  • Founders should not exhaust all investor options in one go but should tier their outreach.
  • Comparing fundraising to a comedian testing their material, it should be an iterative process that adapts based on investor feedback.
  • Multiple term sheets are crucial for maintaining leverage and control over the fundraising process.
  • Establishing relationships with VCs well before fundraising can facilitate trust and understanding during negotiations.
  • Deadlines can instill urgency in the fundraising process and force decisions from potential investors.

"Segment your investor list that you're going to canvas, and go to one set of investors that first time where you're testing the market. But don't go to everybody and have a second set of investors if that fails."

This quote advises on a strategic approach to investor outreach, suggesting a staggered method to avoid overwhelming all potential investors at once.

"Don't anchor those potential investors. It needs to be at the last round, it needs to be at X or Y."

This quote advises against setting rigid expectations for valuation with potential investors and emphasizes the importance of flexibility in negotiations.

Marketing Spend During Downturns

  • Marketing spend can be more effective during downturns as competition may decrease.
  • Decisions on marketing should consider the strategic value of growth rates and the opportunity cost of not investing in customer acquisition.
  • It's important to evaluate whether high growth rates are necessary for market capture or if a more conservative approach is warranted.

"The marketing spend that you have now is so much more powerful than the marketing spend you had say during 21 why your competition has pulled back."

This quote highlights the increased efficiency of marketing spend during downturns due to reduced competition.

"Is there a really strategic reason that growing 70% is so much better?"

This quote questions the necessity of aggressive growth targets and suggests evaluating the strategic importance of high growth rates.

Hiring Experienced Executives

  • Experienced executives can be worth the investment as they may bring efficiency and effectiveness to their roles from day one.
  • Founders should hire experienced executives in areas where they have weaknesses and can hire more junior staff in areas of strength.
  • The hiring process for top talent can be lengthy, so it's important to plan ahead and not wait until it's too late.

"A good executive pays for themselves."

This quote argues for the value of investing in experienced executives, as they can bring significant returns through their expertise.

"You have to hire ahead of the need, and it's tough, but you got to hire ahead of people."

This quote advises founders to anticipate future needs and hire experienced executives before the need becomes critical.

Balancing Growth and Profitability

  • Founders must balance the trade-offs between growth and profitability (Unitycon).
  • Growth should not be halted completely unless it's strategically necessary, such as when a product needs refinement.
  • Recent performance is more important than historical data when it comes to raising capital.

"You're right, you do need both. But it's a question of time frame and trade offs because they're not mutually exclusive."

This quote acknowledges the necessity of both growth and profitability but emphasizes the need to consider the appropriate balance over time.

"We were growing super fast. We were growing 50 or 100%. People care about the most recent data points, not the oldest data points, and you got to show them that."

This quote underscores the importance of demonstrating recent growth trends to investors, as recent performance carries more weight than older data.## Addressable Market Size

  • Demonstrating a large addressable market is crucial for companies with challenging unit economics.
  • A significant market size justifies the risks associated with investing in such companies.
  • Winning in a large market can lead to substantial financial returns.

"You have to show just how amazing the addressable market size is. It's a risk, but it's a risk worth taking, because if you win the market, it's just worth so much money."

This quote emphasizes the importance of communicating the potential market opportunity to investors, as capturing a large market can result in high rewards despite the initial risks.

Trend in Unit Economics

  • Companies should illustrate the improvement trajectory of their unit economics.
  • Historical data can show progress from poor to improved unit economics.
  • Investors can infer future performance based on past trends.

"The second thing is you can show the trend in unit economics over time, which is they were really bad before, they're pretty bad now, and tomorrow they're going to be pretty good, and investors can infer what's happening."

The quote suggests that by presenting a clear trend of improving unit economics, companies can provide evidence of their growth potential and financial health over time.

Concrete Data for Unit Economics Improvement

  • Presenting concrete data is vital to substantiate claims about improving unit economics.
  • Examples from companies like Uber demonstrate the effectiveness of this approach.
  • Data from established markets can showcase positive unit economics, strengthening investor confidence.

"And then finally you need to give them reasons to believe that the unit economics are going to get better over time. Like really concrete data examples, and not just hopes and prayers."

This quote underscores the need for companies to provide tangible evidence, rather than speculative assertions, to convince investors of the potential for improved unit economics.

Going on Offense

  • Companies with sufficient cash reserves can consider expanding aggressively.
  • Hiring talent and spending on marketing are ways to go on the offensive.
  • Economic downturns can present opportunities to attract talent from larger companies facing hiring freezes.

"There's a lot of them, but I think one of them is hiring great people. You may be able to hire people you couldn't hire before... And so your product team can go on offense by hiring better people."

The quote discusses the strategy of using economic downturns as an opportunity to strengthen the team by hiring skilled individuals who might not have been available otherwise.

Talent Retention in Large Incumbents

  • Economic uncertainty can lead to a conservative approach among employees.
  • Those too cautious to leave stable jobs may not be the best fit for startups.
  • Startups require resilient talent that can endure challenging times.

"But on the other hand, the type of talent that is too scared to leave a big company might not be a good fit for a startup."

This quote reflects the idea that startups benefit from adaptable and risk-taking individuals, whereas those who prefer the safety of large companies may not thrive in a startup environment.

Venture Talent Movement

  • The venture capital industry is experiencing countervailing forces regarding talent retention.
  • Despite reduced ties to current positions, it remains challenging to secure a place in venture capital.
  • The trend may result in less frequent job changes within the venture industry.

"There's countervailing forces. One is people are less tied to their current jobs in venture, but on the other hand, getting a seat in venture super hard, and it just got harder."

The speaker is pointing out the paradox of the current venture capital job market—while some factors may encourage movement, the overall difficulty of entering the industry may lead to less turnover.

Decisiveness in Management

  • Half measures are often easy decisions that lack a clear goal or end result.
  • Decisive actions are typically challenging and controversial but necessary for progress.
  • Management should aim for specific, difficult goals to be effective.

"A half measure is usually something a management team lands on because it's easy... If you have a really specific goal and implementing that goal is difficult, that's probably doing your job."

The quote advises against taking the path of least resistance in management decisions and stresses the importance of setting and pursuing challenging goals.

Changing Beliefs in Venture Capital

  • The belief that founders prefer investors without board involvement has shifted.
  • Founders now value investors who can offer support and guidance, especially during tough times.
  • Good board members are actively involved and responsive to the needs of the company.

"Last year, I have to say there was this meme that founders didn't want investors on their board... And that idea is dead. It ain't coming back."

This quote reflects a change in the startup ecosystem where founders increasingly recognize the value of engaged and supportive investors, especially in challenging economic conditions.

Venture Capital Hierarchy

  • The venture capital industry is criticized for being too hierarchical.
  • Promoting young talent can lead to fresh ideas and increased diversity within the industry.
  • The speaker advocates for earlier promotions and sharing of carry to incentivize and reward younger venture professionals.

"Venture is too hierarchical. We promote people too slowly... Venture firms need to promote sooner, give mid level junior people more credit."

The speaker is calling for a change in the traditional structure of venture capital firms to better recognize and empower younger professionals, which could lead to a more dynamic and inclusive industry.

Investor Mindset and Fundraising

  • The investment landscape has changed, and waiting for a return to previous conditions is futile.
  • Successful CEOs adapt quickly to new data and market realities.
  • Fundraisers need to adjust their expectations and strategies accordingly.

"The world isn't going back to 2021. And if you're a founder or an investor and you're waiting to fundraise because you think multiples are going back. You're just wrong."

The quote emphasizes the need for founders and investors to accept the new normal in the investment world and to adapt their strategies instead of waiting for a return to previous market conditions.

Time Management in Venture Capital

  • Time management is a significant challenge for venture capitalists.
  • Balancing firm responsibilities with personal time is difficult due to the demanding nature of the job.

"Time management. It's easy to answer that because it's so damn hard."

This quote succinctly conveys the speaker's struggle with managing the myriad responsibilities and limited hours available in a day as a venture capitalist.

SPACs as an Investment Phenomenon

  • SPACs allowed unproven companies with poor business plans to go public prematurely.
  • The speaker views the SPAC trend as irrational and destined for failure.

"You had pre revenue companies that had bad business plans going public. When they had no business going public, how did we think this would end?"

The quote criticizes the SPAC boom, highlighting the irrational exuberance that led to underprepared companies entering the public market, a trend that was unsustainable in the speaker's view.

Investment Regrets

  • Missing out on high-gain opportunities is considered the biggest investment mistake.
  • The speaker regrets not investing in an entrepreneur who founded a successful company.
  • Opportunity cost is a significant factor in investment decisions.

"I feel like my biggest mistake in the last couple of years was not investing in an entrepreneur named George Fraser, who's the CEO and co founder of a company called Fivetran."

The speaker reflects on a missed investment opportunity that would have yielded significant returns, emphasizing the impact of such decisions on an investor's portfolio.

Investment Advice

  • Having a bias toward action and trusting one's conviction are key pieces of investment advice.
  • Making investment decisions can be intimidating, but confidence and selectivity are important.

"He said a couple things to me. One is have a bias to action as a vc, and two, trust your conviction."

The quote relays advice given to the speaker by a mentor, stressing the importance of taking decisive action and trusting one's own judgment in the investment process.

Hopeful Outlook for Venture Capital

  • The speaker is optimistic about discovering exceptional founders.
  • Finding talented entrepreneurs who are capable of making significant impacts is rewarding both financially and personally.

"Man, the answer for me is the same every 24 months, which is finding the great founders."

This quote captures the speaker's consistent focus and excitement about identifying and working with founders who have the potential to drive change and success in their industries.

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