Protecting Your Startup During an Economic Slowdown: Leading US & Canadian Investors Share How to Navigate Changing Valuations

Jessica Peltz-Zatulove, founding partner of Hannah Grey VC and Cofounder of Women in VC, challenges founders to think two chess moves ahead: 

“Venture Capital and business planning is not only thinking about what valuation can I grow today, but also what valuation can I 2X or 4X in that 12-to-18-month period. Founders should be thinking about what an appropriate valuation for me is based on domain expertise, customer pipeline, market opportunity, and business traction that the business will be able to grow into and exceed. Additionally. It’s being mindful of a valuation they’re comfortable with regarding the dilution they will need to take.” 

Neeraj Jain, General Partner of MATR Ventures, a seed stage fund which invests in underestimated founders: women, Black, Indigenous, People of Color (BIPoC), LGBTQ2S, and Neuro-diverse communities, concurs that there will be less appetite for risk. The bloated valuations of the previous year will naturally mean there will be less competition from VCs trying to get into deals. His advice is the same whether it’s an up or down market,  

“Build a good company. Focus on the obvious things: revenue, costs, the team… what kind of IP do you have? Are you disrupting the market? I think one of the things that’s going to change is that money will be a little bit harder to get so now you are going to have to show more traction than before… it is really about the package: What actual value are you creating? And that needs to be real.” 

Julianne Zimmerman, Managing Director, Reinventure Captial, which invests in US-based companies led and controlled by BIPoC and/or female founders of all identities, says that founders should think less about valuations and focus on the direction the company is on, how they are accessing capital and the most appropriate terms that track to their objectives: 

“What I always encourage founders to do is to think ahead about all the capital you will expect to raise: equity, debt, whatever capital you will expect to raise to reach your objectives. And then think about how you want to position the company at each of those junctures such that the capital you’re taking in really puts you on the best possible trajectory, not only for the next milestone, but on path to that ultimate objective.” 

Danielle Graham, Managing Partner of Phoenix Fire and Cofounder of The Firehood, an angel fund and network focused on women in technology, emphasizes the need for founders to know who they need to target for capital. 

“One positive side – the type of people who may be looking to reinvest their capital in alternative assets will be more incentivized to participate if they have access to high potential technology startups. When people become risk averse, they use an economic downturn as an excuse to not participate and take that risk for the potential upside, whereas an intelligent investor, in comparison, would participate.”  

For the founder, Graham notes they need to be open to new considerations at this time when dilution will be of greater concern if the founders raise less capital.  

“That will obviously lead to more post funding strategies that will mean being frugal with your capital, managing cash flow, curtail hiring and giving employees confidence during this downturn. Watch spending and give yourself as much runway as possible because you are going to have to survive through this funding scarcity.” 

Shirley Speakman, Senior Partner, Cycle Capital, an impact investment company focusing on cleantech, describes the VC appetite to put capital to work in new entities is going to wane because they will need to focus on the health of their existing portfolios. For founders, the key to survival is risk mitigation and cash management: 

“Do as much as you can to mitigate the associated risk, so make sure that you have revenue coming in, that you have longer term contracts, that you can do whatever you can with the business that you must give the potential investor more confidence that the risk is controlled. And manage your cashflow like there is no tomorrow – have strong control over your cash forecast. Understand when revenue is late, and its impact on payables and overall cash flow. Know what levers to pull you through this time. People hear that and they often say, ‘Okay well then, I must cut [staff].’ You cannot cut bone because you lose a limb when you are trying to recover, so it’s important to be judicious and prudent with your cash.” 

Founder and Managing Partner at Preference Capital, Andrew Opala, indicated that while down rounds may be inevitable at this time, the key is ensuring your round is always better than the last one; your valuation is higher, and you’re good! 

“Airbnb had a down round when there was a market downturn, and they crushed the ownership. Now they’re doing well! Founders don’t want to risk everything that will make the company go under because they valued it too high, thinking they were going to roll through this. There is no problem with including ratchets in your valuation that allow founders to get back investor shares if they reach specific valuation milestones.” 

All agree that cash is king. Jain, of MATR Ventures, emphasizes focus on increasing revenue: “Can you launch something a little earlier than you originally intended to? Can you put a premium version out there to increase your price?” Sarkar adds that if you benefit from having a large injection of capital you need to focus on making excellent operational choices while reducing the burn rate and having the net dollar retention.  

Alaric Aloor, General Partner at MATR Ventures, also recognizes the “exceptionally bloated” valuations in the last few years. This downturn, to him is a contraction where money is no longer easy to attain. This period is a reckoning, and he believes the “cream will rise to the top.”  

“For a founder raising in this contracting economy, it is important when you approach potential funders to show them the sum of all your resources … talk about your intellectual capital, your technology, your brand value and financial assets you bringing to the table. And because there is no universal universally accepted formula to determine the valuation, we must start with the amount that you may want to exit with, factoring in the expected return on investment, the amount the founder invests, and the stock holding percentages that we want to negotiate with the founders to arrive at this this pre money valuation.”