Phoney slowdown, real slowdown
Gil Dibner

At the beginning of World War II, there was an eight-month period called the “Phoney War.” Germany invaded Poland on September 1, 1939, and in response, Britain and France immediately declared war on Germany. But until Germany invaded France and the low countries in May of 1940, very little actual fighting took place between the militaries of Germany on the one hand and Britain and France on the other. The relative calm of the “Phoney War” period belied the tremendous violence and turmoil that was to follow shortly thereafter. It’s admittedly a weird analogy, but I have begun to feel in the past few weeks that we are about to transition out of the “phoney” VC-centric slowdown of the summer of 2022 and into the real economic slowdown of the winter of 2022–2023.

The phoney VC slowdown. Initial signs of the VC slowdown began back in December of 2021, as the crossover funds began to pull back from (or retrade) some of their later stage bets. Mid-stage and early-stage funds began to pick up on this in earnest in January, and things continued to slow through Spring. By April or May, most venture market participants had fully adapted to the new market conditions. Round sizes dropped, fundraising processes returned to a normal time-scale, and valuations gradually began to come down to earth. For most VCs, the summer was relatively quiet in terms of new deal activity. Many VCs took vacations (for the first time in two years), and things were strangely quiet in VC-land as the Nasdaq rose steadily through August. We were definitely in a slowdown, but unless you were a startup CEO trying to raise a round (or a VC trying to help a portfolio CEO fundraise), the end of summer felt promising. Most importantly, none of this “VC slowdown” impacted the pace with which real companies were able to sell their real products to real customers. If you were fortunate enough to have a real business, it was business as usual, and maybe it would all be ok soon enough.

The real revenue slowdown. My sense is that the real slowdown is only just beginning now. If the “phoney VC slowdown” was mostly about the pace, size, and valuation of VC investments, the “real revenue slowdown” is about the impact of economic conditions on the purchase of new software and technology by real companies. My sense is that this slowdown is now happening and — I fear — beginning to accelerate. I am an avid reader of Jamin Ball’s newsletter, which provides a concise recap of public market activity for SaaS giants. Recently, he has started to report on increasing numbers of public SaaS companies that are starting to miss their numbers and/or reducing their guidance for future quarters. This is happening to startups too — and we see it in our portfolio. There are some companies out there that are still beating their numbers — but the majority are starting to struggle to hit their growth targets. In our little portfolio alone, 3Q revenue numbers have been impacted by customers implementing spending freezes, customers going out of business, customers trying to renegotiate pricing, customers where key champions are fired or laid off, and customers that just seem to disappear for no apparent reason — only to resurface weeks later, still engaged with the product but strangely less willing to pay for it.

Venture dollars versus customer dollars. The phoney VC slowdown plays out mostly on the plane of hype: companies that need overblown venture rounds to keep hiring or prove “success through valuation” are impacted by a reduced VC activity, but that’s all. It doesn’t really impact “real businesses.” Unlike the phoney slowdown, the real revenue slowdown hits real businesses much harder than it hits hype companies. Ironically — but not surprisingly — the more “real” your business is, the more affected by the real slowdown you will be.

Prediction. I’m not a macro-economist or a political scientist, so I don’t claim any insights on what happens with interest rates, inflation, oil prices, the war in Ukraine, or political turmoil in Europe or the US. What I do know, however, is that all the risk factors that were in place early in 2022 seem to remain in place today. Real-world companies — from enterprises to SMBs — are starting to feel the effects and appear to be adjusting their spending priorities. It’s going to be harder than anticipated to hit your numbers — and if you are a startup in a new market with a new product — you are almost certainly not going to hit them.

Advice. None of this should spell doom for strong companies with alert leadership and engaged boards. My advice is pretty simple: get way out ahead of this by doing a few things that are within your control:

• Triage your existing customers and your pipeline. Try to understand how much of your existing revenue is at risk and how much of your pipeline is unlikely to ever materialize.

• Rebalance growth towards sustainable customers. If you relied on “venture-backed” (i.e. unprofitable) startups to meet part of your revenue targets, now would be a good time to rebalance towards profitable, stable customers.

• Focus on forecasting. Your forecasts are probably wrong, and now is the time to try to get really good at forecasting. It’s far better to forecast accurately than to over-promise. If anything, adjust your forecasting methodology so that it’s overly conservative. Positive surprises in this climate are great. Negative surprises can be devastating.

• Adjust spending plans to reflect slower revenue. Bringing your revenue forecasts in line with our new slower reality may lead you to decide to spend a bit less or hire a bit slower. In hindsight, this is going to be a blessing.

• Communicate and align. Don’t be afraid to communicate your updated forecasts to your board and your team. As always, the key to healthy board relations is to avoid surprises and to invite your board members into your reality so that they can help you navigate that and can better understand the decisions you are making.

If you are fortunate enough to be selling something for real money — count your blessings. While the real revenue slowdown will probably affect your business, you are lucky to actually have a business that is “real” enough to feel the effects. There are no guarantees, but if you stay focused on growing revenues through the slowdown, you have a good chance of getting to the other side. In this climate, the companies that are mostly hype don’t have a prayer.

EVENTS

Sep 21 / Lessons Learned From Investing Early in Over a Dozen SaaS Unicorns Including Salesforce, SuccessFactors, Box, Gusto, SalesLoft, ServiceMax, Veeva, Bill.com, Doximity, Yammer and Zoom Among Others
Jason Green, Founder & General Partner, Emergence Capital

Sep 28 / The Evolution of Collibra’s Product Positioning & How They Created a Category
Stan Christiaens, Co-Founder & Chief Data Citizen, Collibra

FROM THE BLOG

It’s Not All About Bottoms-up
Two recent trends indicate that we may finally be past the mistaken belief that bottoms-up is the only “fundable” business model in town.

Don’t be Fooled by the PLG Mullet
How to know if you should be building a PLG Now, PLG Later or PLG Never company.

PLG Now, PLG Later, or PLG Never
Why there is no helicopter shortcut to the summit of Mount PLG.

For Early-Stage Venture, It’s Go Time
Don’t tell anyone, but this is the best venture market in years.

WORTH READING

ENTERPRISE/TECH NEWS

To the moon! NASA is gearing up to launch its Artemis program, which aims to return astronauts to the moon for the first time in decades. The Wall Street Journal has more here. The test launch was originally scheduled for August 29, and then September 3, however both launches were scrubbed. The launch may now be delayed till October. The Orion spacecraft will eventually take flight without crew, in preparation for a manned mission in 2025.

Heatwave leads to EV havoc. China has been experiencing a globally unprecedented 70-day heat wave, with temperatures reaching 113°F (45°C). As a result, charging points for electric vehicles (EVs) have been temporarily closed (or are only opened during non-peak periods) in an effort to save electricity, leaving EV owners stuck waiting in endless lines to charge their vehicles. This shines a light on the particular challenge of climate change. The widespread adoption of EVs is a positive insofar as it reduces humanity’s reliance on fossil fuel, but the infrastructure that keeps EVs running is susceptible to disruptions in the power grid, which are happening increasingly frequently. This is a stark reminder that no single innovation will be enough to turn the tide against climate change.

AI Art. If you’re curious about artificial intelligence’s impact on art and creativity, I highly recommend this interview with David Holz, founder of Midjourney. Midjourney is a 10-person research lab that has developed an AI image generator that can be accessed via their Discord server. (Join the Discord via Midjourney’s homepage here). The interview provides a fascinating view into some potential issues AI image generation may face (copyright, misinformation), but is also an inspiring story of entrepreneurship, hustle and technical breakthroughs.

HOW TO STARTUP

Nailing a product-led Series A. Useful series A guide for PLG founders from OpenView Partners. They compile the specific characteristics and metrics that investors look for when a product-led company is going to raise a series A. In addition to some characteristics that are pretty standard (e.g. multi-billion $ market opportunity), this report highlights some PLG-specific characteristics that are worth noting:

• Does the founder have a keen understanding of both product and distribution? That’s rare, but critical for product-led growth to succeed.

• Is the team data-driven in their decision making?

• Can you self-serve sign up and use the product?

• Are there early signs of product-market fit (whether via free or paid usage)?

• Is retention improving over time, as the product/marketing is improving?

• Does the team have a North Star metric that they’re focused on, and can they show evidence of accelerating growth (20% m/m is the goal)

Pipeline is prologue. Tomasz Tunguz of Redpoint Partners published an excellent pipeline analysis playbook this past week. Given the rapid shift in market conditions, closely monitoring and managing your pipeline will be of critical importance to enterprise founders. This guide is a good place to start.

Solving the startup Kobayashi Maru. Alex Rampell of a16z told the story of how he, when leading his startup TrialPay, solved a problem that may sound all-too-familiar to founders in the current market environment: what do you do when you “can’t raise cash without growth; can’t grow without raising cash”? How do you escape the doom loop (best employees leave as equity value tanks, burn goes up as pay people to stay etc.). Highly recommend you read the thread for the whole story. It involves a spinoff, an IP sale, and some deft management.

HOW TO VENTURE

Late-stage bridges. Excellent overview from Carta on the state of private market investing. While venture activity has slowed down as compared to last year, it’s still on pace to exceed annual totals in 2020 and earlier. That slow down is also not evenly distributed. Growth rounds (series D) saw the deepest drop between Q1 and Q2 2022 (falling 48%). Compare that to series C, which only fell 4% over the same time period. We’re also seeing the rise of the pre-IPO bridge round, as companies that planned on going public in 2022 or 2023 are tanking up to wait for the market to turn around. As Chang writes in Carta’s report: “bridge rounds became nearly three times as common at Series E and beyond, comprising 22% of rounds in Q2 2022 versus 8% in Q1.”

Where’s the M&A? With a non-existent IPO market, and a slowdown in late stage financing, you might expect to see a rapid increase in M&A activity. Not yet, according to Crunchbase. Some big deals have gone through (e.g. Aptiv buying Wind River for $4.3 billion; Sony acquiring Bungie for $3.6 billion; and GSK buying Affinivax for up to $3.3 billion), but overall the market has stayed remarkably stagnant. Last year, there were 3,000 M&A deals globally involving VC-backed companies. As of halfway through Q3 this year, just under 1,600 VC-backed startups have been acquired. There are two potential reasons for this: (1) startups raised loads of cash over the past two years, and don’t need to be acquired…yet; and (2) with inflation and the increase in interest rates, money is more expensive now than before. Experts expect M&A activity to pick up in Q1 or Q2 2023.

PORTFOLIO NEWS

Datos Health and Amgen aim to find out if real-world remote monitoring can help doctors treat heart failure with a new US study in heart failure patients.

Planable’s CEO, Xenia Muntean, shared what makes Planable’s culture standout: “We have unlimited PTO at Planable, paid lunches and healthy fruits and snacks at the office, a flexible work schedule, private medical insurance, a learning stipend that each team member can decide what to spend on, an annual company retreat in a fabulous location to disconnect and reconnect, and even a nap room at the office.”

Front’s CEO, Mathilde Collin, will be leading a session at TechCrunch Disrupt 2022 on “How To Manage Staff In A Remote, Asynchronous Reality”.