The long hangover
Gil Dibner

A lot of my conversations with VCs and founders these days have a post-party aura to them. Many of us have been warning or predicting or complaining about the coming “crash” in valuations for over a year. In some cases, for far longer than that. When Covid hit, some of us — myself included — assumed for a brief period that the pandemic would usher in the crash, the return to more normal valuations and a more normal investment pace. That, famously, did not happen, and the party raged on through 2020 and 2021, faster and more furiously than anyone had any right to expect. Given the great Covid headfake, I think a lot of us are reluctant to say out loud what we all know is true. But now, finally, over the past few weeks, it’s become clear that the “tech crash of 2022” has arrived.

There are many reasons for the negative sentiment that has spread across the financial and technology markets: inflation, higher interest rates, broken IPOs, and fear that the terrible Russian atrocities in Ukraine will spark something worse. Whatever your analysis of the causes — and whatever your view on how deep we’ll go and how long it will last — it’s pretty clear that the weather has changed.

Today, founders must navigate through a climate that is vastly different from the one of just a few months ago. For all but the most obvious companies, fundraising will take longer and be harder. Rounds will be smaller. Valuations will be lower. Budgets will be tighter. Here are a few thoughts on how founders can think about adjusting their mindsets and planning to adapt:

• Recognize that fundraising can be just another vanity metric. Dilution matters and cash matters, but running your business to maximize the size or the valuation of a round, makes no sense in today’s climate. Instead, founders should focus on key business objectives that de-risk their company. To survive, you do not need to raise more than your competitors. Those days are over. Let your competitors struggle through the high burn rates and overly-fast hiring that their mega-rounds have encouraged. To win, you will need to build a better product than your competitors and prove that to be true through the real experiences of real customers. Startups are underdogs. Embrace it.

• Triage customers and design-partners. Your customer base may probably be struggling in this climate as well. Make sure you understand the resiliency of your customers: are they early-stage startups or profitable enterprises? Where are you on their priority list? Can your design partners deliver the time and attention you need from them in order to validate your thesis?

• Take the pain early. If there are any ways you can cut your burn rate without sinking the business, do it now. Founder after founder tell us that they regret waiting to make difficult HR decisions. Today’s challenging climate should make those decisions easier.

• Be thesis driven. Any early-stage company is really a set of experiments around a thesis. That thesis — and the experiment you undertake to prove it — are a north star that should endure even through difficult times. Your early customers will respond to products that truly solve their problems in unique and powerful ways. The best investors know how to read those signals. The best CEOs know how to tell those stories.

• Everything will take longer: Be kind to yourself and accept the true stage of your company. Unless markets come roaring back, my strong suspicion is that everything will seem to take longer. This is a bit of an illusion, however. We have all been living through a sustained period of ever faster perceived traction — but, in most cases, it wasn’t true. Just because you got to $1M ARR, for example, doesn’t necessarily mean you have product-market fit. Just because you got a $100M valuation (on your $1M ARR) doesn’t mean you have product-market fit either. Up until a minute ago, however, companies were experiencing this: rapid ARR growth and even faster valuation expansion and — presto! — we must have product-market fit. Today, the valuation expansion — the outside validation — is starting to slow down. The result is that many founders are realizing that they are a stage or two earlier than they might have been led to believe just a short time ago.

We are witnessing, to quote a friend, a massive “rerating” of risk for startups. In effect, we are all collectively waking up from a very nice dream. Reality hasn’t really changed but perception of reality has. We can all see the risks our companies face a bit more clearly now — and that, for the wise among us, is a blessing in disguise. You can’t fix what you can’t see. Now that the party has stopped, now that the harsh lights are on, we can all see the world a bit more clearly than we could while the party raged. If your company, your product, your team, your plan seem a bit less shiny than you had hoped — that’s ok. Grasping reality is the first step towards enduring greatness.

Thanks for covering for me. Astute readers of this newsletter may have noticed that the last three weeks had (1) really good columns that (2) were not written by me, but by David. David was kind enough to cover for me while I was out on an actual vacation — my first pure family vacation since the pandemic began. The following week, I had Covid along with my wife and daughter. It’s been amazing to watch (from the distance of vacation and then from a covid isolation), the Angular team function so beautifully without any input from me whatsoever. In recent days, we also completed the first Angular investment that was 100% sourced and executed by David. That’s a major milestone for us as a firm and a sign, I know, of very exciting things to come.

Tel Aviv. I’m off to Tel Aviv on Friday for two weeks. If you want to connect up in person, ping me.

Stay strong!

Gil

EVENTS

Apr 11 / How to Employ Category Design as a VC
David Peterson, Partner at Angular & Al Ramadan, CEO of PlayBigger

Jun 1 / The Importance of Culture and Values As You Scale a Business
Oren Kaniel, Co-Founder & CEO, AppsFlyer

FROM THE BLOG

Why Building a “Compound Startup” Might be the Next, Great, Non-Obvious SaaS Play
Or why “just focus” might be bad advice.

Enterprise & Deep Tech VC in Europe & Israel 2021
A data-driven look at a record-setting year.

Shifting Left, Shifting Right
Are we on the cusp of a new era of empowered non-engineers?

The Problem with Engineering-led Growth for Early Stage Startups
What kind of growth team you need to hire depends on the stage of your company.

EUROPE & ISRAEL FUNDING NEWS

France/E-Commerce. Akeneo raised $135M for its product information management and product data intelligence software allowing companies to deliver product experiences across sales, marketing and customer support channels.
Germany/Communications. Staffbase closed $115M to help internal teams craft, send out and measure the impact of their communications with their organizations.
Israel/ML Compute. Run:AI raised $75M for its deep learning that essentially “breaks up” AI models into fragments that run in parallel, cutting down on hardware memory usage.
Netherlands/E-Commerce. ChannelEngine closed $98.5M for its cloud-based solution that enables merchants to sell on many marketplaces.
Germany/E-Commerce Marketplace. Profishop raised $35M for its aggregator marketplace that supplies handicraft businesses and medium-sized companies with equipment and materials — for example, cable drums, screwdrivers or spotting paste.
France/Logistics Services. SpaceFill raised $27M for its cloud-based end-to-end warehouse management solutions.
Israel/Sales Enablement. Rightbound raised $15M for its platform designed to automate manual B2B sales processes.
Israel/Real Estate. anywell raised $15M for its workspace-as-a-service solution that is committed to creating a more human-centric, flexible future of work.
Israel/HR. Compete raised $15M for its payroll for real-time compensation and benefits benchmarking.

WORTH READING

ENTERPRISE/TECH NEWS

State of Current Market. Redpoint’s Logan Bartlett put together a thorough deck on the current state of the tech market. The entire deck is worth reading, but here’s the key summary:

• “Business fundamentals remain healthy: software companies are growing faster and more efficiently than before

• Public software multiples are still well below recent history

• IPO window likely closed for the foreseeable future with market volatility at current levels

• Companies like Chime and Justworks have rethought IPO plans

• M&A market will likely pick up for public companies when management and boards adjust to the “new normal” and not 52 week highs

• Private market M&A will likely take longer, both because of higher revenue multiples over last 18 months and lack of daily mark-to-market

• Private markets have not yet meaningfully corrected → anecdotal information about retrades and lower prices but not widespread. 100–200x+ ARR deals are still happening regularly

• Currently many companies in private markets (particularly at late stage) are in “price discovery” mode in fundraises with everyone trying to figure out market price → rounds are taking longer to get done and “willingness to pay” spreads are wide

• Can try to draw insight from internet bubble and housing crisis for how it might impact private markets. Each took ~10 quarters to go from peak to trough → would mean we are still 2.5 years from bottom”

Fintech valuations gap. Like many other public tech companies, publicly traded Fintechs have taken a beating recently. Many are even currently trading below their IPO price, including prominent names such as SoFi, Marqeta and Robinhood. On the private side, Fintechs’ valuations are still sky high. Most notably, Stripe and Klarna are currently worth $95B and $46B, respectively. How will this valuation gap affect the market? It’s likely that the private Fintechs will hold off going public, as doing so now would likely generate a subpar return.

HOW TO STARTUP

10 PLG principles. Many of today’s top tech companies have successfully grown bottoms up, from Shopify, Twilio, Canva to Airtable. After analyzing the highest-performing PLG companies, Bessemer has put together a great summary of the 10 key principles for harnessing PLG to build an enduring business. In our opinion, one of the most important principles is “Deliver a eureka moment instantaneously. Leading PLG companies know it’s essential to delight the user as soon as possible. The best products can deliver an epiphany about the value of the product without unnecessary friction. There is no need for lengthy onboarding processes involving complex sign-up forms or demos with promises. Instead PLG companies allow users to try out the product right away to experience its benefits directly so that time-to-value is near immediate.”

Raising VC capital in today’s market. After last year’s record year for VC investments, this year’s uncertainty — fueled by inflation, war in Europe and the public market pull back — has led to many VCs becoming more cautious. Founders currently raising are likely to experience “more due diligence, less inbound interest, and fewer crossover investors”. As there is no current end in sight to this period of uncertainty, founders may benefit from being more cautious as well — and freezing or lowering their burn.

HOW TO VENTURE

VC funding dip. To get a better understanding of the VC funding dip, it’s helpful to look at the data behind the headlines. Just how much did the VC landscape change in February?

• VCs invested $52B in February, $10B less than they did in January.

• Seed-stage funding grew slightly month over month, while early-stage funding fell 17%, and late-stage funding dropped 19%.

• Sequoia Capital, Temasek, Fidelity and Goldman Sachs led fewer rounds above the $100M mark last month compared to monthly investments led in 2021.

PORTFOLIO NEWS

Valohai’s advisory board grew with the addition of Michael Del Balso, CEO and Founder of Tecton.

Candu’s CEO, Jonathan Anderson, spoke on the Just Go Grind podcast about problem identification, Product Hunt, and the future of no-code. Listen here.

Forter’s Mey Beisaron, one of their infrastructure developers, was profiled in a diversity series aimed at bringing the most inspirational and powerful women in the tech scene to the forefront.