Will Your Company Survive the Next Crash?

There’s been a lot of discussion recently about runaway valuations, unicorns and the impending signal that we are approaching another bubble that will come crashing down and crush the dreams of another wave of entrepreneurs.

For those of us who were in tech during the first dotcom bubble in 2000, as well as the second crash in 2008, this sounds like a familiar story. If you’re an entrepreneur today, it would be wise to start thinking about how your start-up will survive if history repeats itself.

In both of the earlier cycles, I recall seeing a presentation from Michael Moritz of Sequoia. In it, he said to act as if you won’t be able to raise new money, reduce your burn by 25% and eliminate all external consultants and non-essential personnel. This is advice I would give to my own entrepreneurs in a time of crisis, regardless of an impending crash or not.

Then last night, I saw this tweet from Marc Andreessen:

So what does this mean for entrepreneurs who are currently trying to determine their fundraising strategy?

(1) Figure out how much money you need to get to cash flow break-even.  At Scout, we tend to invest in businesses that can be capital efficient on less than $5M, but sometimes getting to profitability isn’t achievable within this range.  In these cases, its critical to make sure you have a deep understanding of the metrics needed to raise a follow-on investment.  In a down cycle, this is a very competitive process.

(2) Start your fundraising at least 6 months before you run out of cash.   The current environment has entirely too many early stage companies competing for the Series A and B rounds, so plan accordingly.

(3) If your initial set of conversations don’t go well, see if your existing investors have an appetite to bridge.  The best way to buy more time is to get more money.  If you are doing a good job and building something worthwhile, then your existing investors should have incentive to provide more capital. If they are not interested, you should ask them to be candid as to why not. They may have concerns that need to be addressed before you talk to any outside investors.

(4) Use your networks.  The best way to make progress is with warm intros from people who have stronger relationships than you.  It’s important to reach out to your existing investors, advisers and mentors early in the process to help expedite getting new money.

(5) Be smart with the capital you already have.  As we’ve said before, the number one thing that kills early stage companies is running out of capital.  So in a questionable environment, don’t waste money on things that aren’t core to your business or demonstrating metrics to get to the next level. You’ve heard it a million times, but try to exercise lean thinking in every stage and aspect of your business. If the bubble pops, we’ll all need those skills.

Hope this helps.

Will Your Company Survive the Next Crash?

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