For months we’ve heard that startups should prepare for a recession that is looming in the future. But it always appeared to be around some distant corner. Well, it seems we’ve arrived. Giga Om is reporting that Sequoia (considered by many to be the top VC) held an emergency meeting yesterday warning their portfolio companies to buckle down. B rounds are already a wasteland – at least that’s the sentiment of the VC with whom I had coffee yesterday. He claimed that money is still rolling into A round startups and that companies needing a C round often have solid financial metrics. It’s the companies that are approaching a B round that are suffering.
So how can early stage startups weather the storm?
- Raise as much money as possible on the A round.
- Measure everything from day one. Last week’s Startonomics conference has sessions on using a metrics driven approach to execute all the key parts of a startups. Watch these videos . Resources should only be invested into development and marketing initiatives that deliver measurable results.
- As soon as you have raised your series A, figure out the financial performance you’ll need to be considered “a safe bet”. The best time to raise money is when you are near cash flow positive and have identified several scalable positive ROI marketing programs. If you need the money to fund these programs and reach your full growth potential – you’ll raise the money. During frothy times you can raise money on hype; don’t count on hype valuations during a recession.
A recession is when the real entrepreneurs emerge. Those who think it would be “neat to start a company” generally prefer the safety of a stable job during a recession. LogMeIn was born in the last recession. While we had a really hard time raising our $10m A round, twelve months later our $10m B round was much easier based on our proven metrics. We then went on to build a company that now has its software on 50 million devices and is still on deck for an IPO. Google also emerged during the last recession. While the stock has suffered recently, it remains one of the most successful tech companies ever.