As an investor with 20-plus years of experience, I’ve lived through—and supported founders through—multiple downturns. For any founders and entrepreneurs who may feel stressed and overwhelmed by the turmoil in the public markets, I wanted to share three guiding principles that I hope can offer another perspective.
Founders are actually “momentum managers in chief”
If you’re a founder or a leader, you’re also what I like to call the “momentum manager in chief.” Startups by their very definition have to earn their right to live—they’re guilty until proven innocent. It can sometimes feel like the founder against the world, and founders need to build a team that can fight the fight.
To gain relevancy over time, you have to show momentum through:
- Larger fundraises and increasing prices over time
- Financial performance that matches or exceeds expectations
- Customer belief in what you’re doing
- Hiring and retaining great people with quality and experience, improving as you build your team
- Press starting to pay attention and building a favorable impression of what you’re doing
Focus on the levers that you can control because if you lose momentum, you unfortunately may never recover.
Learn to live on the cash that you do have
As an entrepreneur, you probably already know that the one cardinal sin you can’t commit is running out of money. In a bull market, most entrepreneurs planned to raise money with frequency, which can lead to unsustainably high valuations. Through no fault of their own but rather due to market conditions, many companies are now upside down—this means that founders can’t raise money at or above their last round valuations. Don’t expect the market to recover or investors to forget the laws of gravity when you need to raise money again. The market may recover quickly, but hope is not a strategy.
If you haven’t already, it’s time to modulate your burn so that the cash you have is the cash that you can live on for a long time. The smartest founders will use what they’ve got, which may mean moderating growth and cutting some expenses.
Hitting rock bottom can be a blessing in disguise
History has shown that public investors can remain skeptical of many companies for long periods of time. Somewhat paradoxically for sentiment to shift, sometimes investors need to see companies hit rock bottom to be convinced. While it may be hard to accept right now, going through the depths of a bad macro cycle may be just what some companies need in order to convert skeptics into believers.
Today, many companies leverage management tools like Workday, BambooHR, Lattice, and Culture Amp to monitor employee performance. I’m reminded how SuccessFactors—the first company that helped automate the performance appraisal process—struggled after its 2007 IPO, dropping well below $10 per share despite strong financial performance. Investors just didn’t believe that SuccessFactors could withstand a downturn when companies stopped hiring people at a rapid rate. Skeptics predicted SuccessFactors’ customers would cease caring about performance reviews when firing people during a recession, and investors expected churn rates to spike as a result, ultimately reducing the value of SuccessFactors to zero.
Sure enough, the Great Financial Crisis (GFC) of ‘08/’09 hit shortly thereafter, driving SuccessFactors stock down to a low at about $4 per share. Like other companies during this period, SuccessFactors laid off some of its workforce, reducing its expense base. At the same time, SuccessFactors showed growth in revenues, albeit at a lower rate than its growth rate prior to the GFC. The company also retained its customers at a high rate—as it turns out, companies in a down market still want visibility into who they should let go and who they should keep.
Despite the slower growth, SuccessFactors’ stock price began to increase in value. To start believing, investors needed to see the company had enduring value to its customers, even in a downturn. Investors were richly rewarded—ultimately, SuccessFactors was acquired in 2012 by SAP for $40 per share, showing how sometimes you have to go through low points to prove that your business is going to stand the test of time.
As another generation of founders grapples with uncertainty and hard decisions, these principles still apply to today’s startups. Rebounding from these depths can also reaffirm what the most resilient founders have been saying all along: “Our business is not going to die. It’s going to survive and thrive.” In the case of SuccessFactors at least, sometimes what’s bad is actually good for you—and why the current market might be a blessing in disguise for some startups.
I was a board observer and led GGV’s investment in SuccessFactors in 2006 and 2007, where I helped advise the CEO and CFO through the IPO process and into life as a public company.
"Startup" - Google News
May 25, 2022 at 09:22PM
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How to Stand the Test of Time as a Startup - Forbes
"Startup" - Google News
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