The Prepared Mind in the New Year

With the holiday season comes reflection: did I accomplish what I had hoped entering the year? Was I the kind of person I aspire to be for my family, my friends, my colleagues and my country? And is there anything I can do between now and year-end to help others where my lived experiences and perspectives might be useful? It is this last thought that spurred my writing a note to our Eberg Capital portfolio companies a few days ago, one which reflects my 35 years of markets experience and nearly 20 years as an investor in young companies. After re-reading the email, I figured I would share it more broadly in case it might be useful for others as they prepare for what is sure to be a challenging, uncertainty-filled year ahead. All the best to your family and friends for a happy, healthy and peaceful holiday season, and cheers to a prepared mind as we head into the New Year.

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CEOs and founders of the Ebergs,

I hope this note finds you well and that you’re getting to spend quality time with friends and family over the holidays. Needless to say, 2022 was obviously an “interesting” year in the world. For company founders, this is perhaps especially true. While there were bright pockets, this year has been a massive come-down from the prior 10, where low interest rates, a vibrant IPO market and cheap credit prevailed. We are now looking at a climate with higher rates, slower growth and geopolitical unrest. None of this is good for long-duration equities, the kind of equities that characterize venture-backed start-ups (and high-growth public companies still working towards profitability). The public markets have been brutal on even solidly profitable growth stocks, and this phenomenon, as it does, ripples through the private markets with a lag. So while venture firms are sitting on hundreds of billions of available liquidity, deployments have dried up for many companies that would have easily raised funding 18 months ago.

As a 35+ year markets professional, I can tell you that this will be an excruciatingly painful time, and that it is critical for founders, regardless of stage / maturity, to enter 2023 with a prepared mind to survive what might be a multi-year funding winter. This isn’t meant to scare you but to merely validate that what you’re seeing in the news and in the markets every day is reflective of grave uncertainty: this is amplified by the fact that the Fed hasn’t embarked on a tightening cycle like this in 40 years, a time when they were behind the curve coming out of the 1970s hyperinflation period and Paul Volcker imposed the kind of pain with 20% short rates that no one hopes to see ever again. So that means a likely overcorrection that will crush GDP growth and consumer spending and make the average American pretty grumpy for quite some time. And most startup founders to boot.

So what is a CEO / founder to do?

• Have enough cash on the balance sheet to either get to profitability or to get to a compelling set of milestones that makes raising additional financing a “no brainer” — even in a poor market environment.

What are compelling milestones and how do you best tell the story of the company that most powerfully illustrates its breakout potential?

Write your funding deck NOW — even if you think you don’t need to raise for 12 months, and solicit input from friendly investors who are domain experts and could be the just right investors for your business. These conversations will give you insight into what they need to see to write a check into the business, even if you’re not intending to raise money for many months.

• Have a plan for survival if subsequent financing isn’t available.

Even if the conversations with potential investors “go well”, you simply might not reach their bar for writing a fresh check.

What would you cut? When would you impose radical cuts to ensure survival if it’s clear that the funding market is currently closed to the company? A slow drip of cuts is the worst. We recommend that you retain only the most essential employees related to product, eliminate any and all non-mission critical costs, and focus on sales to get to revenue faster than expected. In essence, whatever you have to do to survive.

• Be early to act and be honest with yourself.

Acting too late to cut burn can be fatal. This is not the market in which you started the company: it’s radically more challenging, and may be so for many months or even years.

You can’t control the market but you can control how you run your business. Focus on what you can do, not what you can’t. This means ruthlessly managing costs, figuring out what customers will pay for right now and making no assumptions that current investors or “friends of the firm” will come to the rescue. They won’t unless it’s in their self-interest to do so.

• Remind yourself that some of the best companies of all-time were born out of a crisis — why can’t that be you?

The years following the Dotcom Bust and the Global Financial Crisis yielded some of the most successful and iconic companies of this generation — Airbnb, Uber, Mailchimp, Square, WhatsApp and more.

Operating within extreme constraints and surviving can sharpen a team’s strategic focus, product choices and recruiting, and when markets become more favorable they are poised to grow fast, grow profitably and crush the competition. This is the silver lining of operating under duress.

Here are some useful resources from Sequoia who have 50 years of experience managing through all manner of cycles, demand shocks, supply chain woes and credit crises.

Blog post on managing risk in the midst of coronavirus:

https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753

Articles on multiple Perspectives that are relevant for early stage founders:

https://www.sequoiacap.com/stories/?_story-category=perspective

We need all of you to take these risks very seriously, and we are not sending this note lightly. It is our desire for all of you to have the chance to build the company you know can make an important dent in the Universe. We are here to help, but ultimately the choice of how to adapt resides with you. You can make it happen.

Happy holidays, Happy New Year and best wishes for a healthy and productive 2023.

Roger and the Eberg Boys.