Best advice for venture capitalists for tech startups in the event of an economic downturn
- Adventure correspondents write to their portfolio companies to warn them of troubled times ahead.
- Investors advise startups to cut costs and keep their money.
- Some venture capitalists say this is the best time to start a company and appear stronger in the long run.
It’s been a scary VC moment when you might finally be here.
After investors poured record amounts of venture money into startups last year, a series of disappointing performances from tech companies led investors to expect a recession, with startup valuations beginning to fall.
Data from CB Insights indicated an expected 19% drop in global project funding for the second quarter. Sectors that typically excite venture capitalists can see less funding. CB Insights said fintech funding will see a 28% drop,
You’ll see a 25% drop, and retail technology will see a massive 50% drop.
Startups like Thrasio, Cameo, Noom, and MainStreet are slashing costs, laying off workers and even looking for buyers.
Like other recessions, including those at the start of the pandemic, investors have sought to reassure their portfolio companies that things will work out while warning them to be prepared for turbulent times. In the 2008 financial crisis, investment giant Sequoia Capital warned founders to cut costs, and “spend every dollar as if it were the last” in a “RIP Good Times” report to its portfolio. The company sent a similar message to startups as the dot.com bubble burst in 2000. Sequoia just issued a warning of its own to its portfolio about the recent downturn, warning founders of this “crucial moment,” when they need to cut costs and preserve cash.
Many venture capitalists take inspiration from Sequoia’s infamous 2008 batch of presentations, in which the founders warn in internal and external memos to prepare for the economic downturn.
Many of these warnings came in notes, but some aggressive investors preferred to speak directly to the founders.
For example, Amar Amdani, co-founder of Adapt VC, says he has been arranging meetings with all of his companies to meet their financial needs in the coming months. Carter Reum, founder of M13 Ventures, says he’s been reaching out individually to each of his companies.
Here’s a brief rundown of what some VC firms have been saying to portfolio firms about how to prepare for a steady downturn.