Earlier today, TechCrunch+ published an open letter to startups from Index Ventures partner Mike Volpi with advice for startups that have different levels of runway. In short, the more cash that a startup has, the more latitude it will have to be aggressive in the present downturn and the looming recession.
We caught up with Volpi last week to talk through his perspective on the market, the disconnect between venture performance and startup operating results, and what portion of startups might be in reasonable shape to attract capital and grow despite a risk-off investing environment.
Check out Volpi’s full note here, and read on for our founder-focused takeaways from our chat with the investor.
Cash rules everything
One claim stood out the most in the investor letter: “Many companies are still hitting or exceeding operating plans.” Given that we’ve seen mixed results in the public market, that statement was a bit surprising.
We asked Volpi how many startups were hitting their plans, and while the investor was hesitant to put too fine an approximation on a venture market that he has limited visibility into, he did estimate that around 75% of startups are hitting — or exceeding — their plans.
Startup operating plans vary in their level of aggression, so the “around 75%” figure may not be as bullish as it reads, but that’s immaterial. What matters is that most startups are still able to sell their goods and services, and we are not seeing the kind of deceleration in startup growth that the public markets might lead us to expect.
More simply, startups are still able to sell in the current market even as asset prices fall.
If that’s the case, what should we make of the steady drumbeat of doom and gloom from investors on Twitter and elsewhere?
Volpi said the people most impacted by rapid market selloffs are investors, not operators, which can lead to VCs and others sounding alarm bells that may not resonate with startup results.
Notably, we have seen a version of this happening in the public markets when some tech concerns posted modestly lower growth projections but were repriced in the wake of their disclosures like they had just admitted to shutting shop.
But the good news that many startups are hitting their plans doesn’t mean that some changes aren’t likely. Customer type, for example, matters. Volpi told TechCrunch that consumer-facing startups might see demand change more rapidly than companies selling to other businesses.
So B2C startups might need to become more conservative with their spend sooner than, say, a startup that sells database technologies to enterprise-scale companies.
Cash matters, too. Per Volpi, the amount of runway that a startup has will determine its operating plan and how aggressively it can spend. The amount of cash a company has, measured in years, is a reasonable metric for divvying up the startup market.
Naturally, we wanted to know how many startups have more than two years of cash. With so many startups raising money more than once last year, we felt a good number have more cash than would have been possible in prior venture cycles.
Volpi generally agreed with our perspective, noting that there is a correlation between the best companies and the best-funded companies. This means the best-performing startups generally have the most cash, though the investor did note that some companies did not raise capital toward the end of last year, leaving them with less runway.
That said, the market’s present demand for lower burn rates will impact startups of all stripes, regardless of how well they’re doing. Some startups have managed to get their burn rates up to $10 million per month, Volpi said, which wasn’t possible in prior startup eras.
From this, we can infer that layoffs won’t just affect companies under operational duress. Some startups that are growing nicely will still want to trim costs to extend runway and present a more profit-forward profile to investors.
Volpi does anticipate some high-profile failures, and we would add that historically high revenue multiples will cause headaches for companies of all sizes and quality. Down rounds will happen, though Volpi made his perspective clear: If your company needs cash, you raise it at any price.
What’s more, the fact that some startups will have to raise down rounds should not be even considered a surprise. With the stock market down sharply, public companies have effectively been dealt down rounds this year. Why wouldn’t startups wind up taking a similar haircut?
To sum it up, startups are still able to sell their products and services, and a good chunk of the more successful startups from the 2021 cycle have lots of cash. They can likely bridge the gap to better times under the aegis of their existing bank accounts. For other startups, things could be choppier, but so long as the market for technology products remains, catastrophe is avoidable.
The old maxim that raising too much capital leads to a lack of focus is still true. It is also true that startups that over-raised last year are sitting the prettiest today. For those companies, the playing field is relatively clear compared to last year. That could make a good plan for capturing market share, provided that founders don’t get too spooked reading venture capital tweets.