I am not a banker or analyst, nor do I know about the macro environment, nor can I foresee the future, but for some reason, I often get asked, likely because I read and like to learn a lot, and here is my view. I do not give financial advice; these are my thoughts and food for thought as a person and for open discussion - here is my best guess.
For Limited Partners (LPs). Actual investment thoughts on the ecosystem.
1. The Market
What the FED says: "Interest-rate forecast. We project a year-end 2023 federal funds rate of 4.75%, falling to 2% by the end of 2024. Further out, our 2026 and long-run projection for the fed-funds rate and 10-year Treasury yield are 1.75% and 2.75%, respectively."
Personal prediction: FED --> Estimated Increase +25bps each Mai, June, and Juli. Terminal Rate max. 5.25-5.5%. EZB: 50/25/25bps in March, Mai, and June, max. Terminal rate of 3:75%. Many argue that banks are struggling, and the recent bailout of SVB, the Credit Suisse, and more may lower the ceiling. Another current indicator is the “Fed Put,” printing more money again and injecting 297 billion dollars, the most significant spike since March 2020. Correlating Bitcoin went up, and so on. In that scenario, inflation is here to stay longer. In the end, no one ever knows.
Possible meaning, my interpretation: The "gale" is at its peak in mid-2023. Until Q2 2024, companies and startups will suffer from a ripple effect (bridge rounds with lower valuations, insolvencies, and more), as it's delayed and hasn't even arrived or seen yet - while M&A, etc., will profit (consolidation, etc.). For startups, a problem will be that they all will have to raise at the same time, Q3 2023 - Q2 2024, which will cause competition and a lack of liquidity to cover market needs. However, I hope for favorable investment decisions by those with liquidity in Q3 2023 (anti-cyclical smarties) and those who recover from 2021 greediness in Q2 2024 (HODL peeps). From that time, we will grow together again in a new macro world of adjusted reasonable multiples, a weaker China, a squeezed Europe, and a solid US but a powerful Asia Pacific region.
There is much fear in the market. LPs, e.g., are not deploying because others don't (lemming effect), and FoF is having a hard time raising. There are many factors and variables in this, and all of the above could change in a second if, e.g., the Ukraine war would stop, just by positive human behavior toward investing. Whatever your interpretation of what I just wrote is, one fact is unambiguous: investing in early-stage software over the following years is the best asset class you can be in! This is my belief. Open for discussion, go!
And the households out there carry the burden with almost 20% food inflation end of this quarter. The basket median of inflation is fake (many important indicators are not taken into account by the Harmonised Index of Consumer Prices (HICP)), and the actual price increase is heavy for the families. I hope this becomes better soon and producers and restaurants stay fair. To date, this is not what I am experiencing in Europe.
2. The Founders. What does this mean to you as a founder (I invest in SaaS, exemplary)?
Ideally, when you did read the Sequoia and YC letter/overview almost 12 months ago, you lowered your burn and extended your runway.
It means within one quarter, one year ago, most public software stocks lost 60% of their value, and this ripple effect goes top to bottom and is now slowly hitting growth startups. In Q3, and Q4 2023, it will hit Early-Stage startups, and valuation will decrease and normalize. Founders must be willing to accept this fact and work hard to catch up with their valuation from 2021. Increase ARR, be efficient, work hard on renewals, keep up Gross and Net Retention, and adjust growth overall, e.g., achieve a good FTE/ARR ratio, muscle up. Increase runway and catch up with your valuation in mid-2024.
You may have to let people go and adjust the hiring plan. Great talent will work elsewhere; operators will become founders, and everyone gets recycled in the ecosystem - it's ok. Said quickly; it's tough; I have been there myself.
You have reevaluated cash flow and reviewed billing plans (% of new ACV Bookings billed in 1st quarter), CEI (Collection Effectiveness Index), Bad Debt (as a % of total Billings), and much more to hold cash together.
You optimize your sales funnel from nurture to a close won. From Omitted, Pipeline, Best Case, To Commit, you work on optimizing the “Win Rate” on every single step in the pipe.
You work closer to the customizer and direct feedback; you ship features weekly now and build whatever it takes for Cross- and Up-Sell. Your product is built to make money and solve problems. You become an OS if needed and are the system core, the system record. Make yourself irreplaceable.
You work around Marketing Channels and create a pipe; you become creative and do it yourself with PR and other new ways that make pipe cheaper, more funnel, and better conversion from blog posts, coms, brands, social media, and much different than performance.
You work around sales; there is no space for mediocrity. Reps and AE must give their all; the team must abide strongly. You review sales cycles, quotas, and attainment and work around close and win rates. Around sales capacity, increased ASP, increased sales efficiency, and lower CAC.
FTE/ACV is a critical KPI for you, muscle up!
You want to withhold from fundraising Q3 2023 - Q1 2024. You want to raise 1 April Q2 2024, with six months runway in the bank. Otherwise, the competition is high, VCs are deploying slower, and it will be harder to attract attention.
Be mindful if there is a way to get some money in. It could be the same terms as the last round or considering working with family offices or strategic if needed. Your job as a founder is to keep this business running.
If you have to fundraise, fundraise; as a common rule, be prepared and have a strong deck and vision. Every CEO's main priority is money in the bank account, knowing what to do (everyone aligned), and pursuing a vision.
If you can find favorable bridge rounds with VCs, angel investors, and family offices, do it, but don't create flying nuclear bombs (examples: crazy venture depts with warranties and high interest, e.g., or massive amounts of different convertibles, SAFEs). Keep it clean (plain vanilla terms) and understand it might come with equity and cap table adjustment.
2021 multiples won't come back in the following years. Get used to it. But this is an excellent opportunity to work tight, be close to customers, reduce burn, and build a gem, ready to go on a 10-year journey once we are in 2024 and back to business. This is an opportunity!
3. Limited Partners (LPs) - Open investment thoughts on the ecosystem
This is my personal Limited Partner view stated for the, at minimum, following three years. With a more professional ecosystem, more capital in the market, more knowledge available, and more educated founders, we see a very different landscape today than ten years ago. Limited Partner will adjust to it, driving a multi-stage strategy and entering an earlier professionalized terrain. However, the best vintages are ahead - that said, here goes:
Atomization of the landscape. <50M volume will perform best. We see nano, and micro, solo GP funds outperform as early or/and specialized in their territory, and they have the highest winning capability. While sourcing, picking, pricing, winning, portfolio management, timing, and selling, winning capability and high conviction are the core differentiators to success in the years ahead. Unique profiles such as former operators and founders will likely position themselves best.
People, not Brands. Serial entrepreneurs and more mature founders are leaving big brands and those who call themselves “value-add” teams; they don't necessarily see the difference between a big VC and a bank. What they care for is who they are working and partnering with - we are seeing a shift from brand to the person to the human being one is working with. A podcast with Harry Stebbings interviewing Kyle Harrison discusses this in particular: https://podcasts.apple.com/lu/podcast/20vc-why-75-of-active-investors-will-disappear-in/id958230465?i=1000583401830&l=de.
The ecosystem of Alliances. With more dry powder and slower injection, the market became more competitive, and in general, there is more availability of capital. That said, the “good” (several signals that indicate - I maybe write a separate blog post about this topic) deals are oversubscribed, and again winning capability and flexibility become essential. While plenty of founders not considered tier 1 suffer in this macro environment. Unfortunately, there is a high significance among the capital raised seed to series a and the likelihood of becoming a unicorn. As many Seed and Series-A investors have a minimum threshold of 15%, they became creative in making alliances over FoF (Fund on Fund) and Scout Programs and leaving 5% to value-add friends, operators, and founders, who could piggyback and will return the favor bringing deals in the future. Flexibility, high conviction early, winning, and value-add squeezing abilities will win.