Five commandments for Unicorns to survive the new fundraising normal
1. You will cut costs, and your cash flow will set you free.
This one seems obvious but couldn’t be further from it. In an environment where all you were focusing on was market share, it is painful to switch to profitability. Just remember all of the talk on a correction becomes noise once you don’t need further funding.
2. You will not take dirty term sheets.
Misaligning your later stage investors from your common, your co-founders and your employees will result in returns for the last-in-first-out investors, while creating disappointment for everyone else. It is also puts your company in a choke-hold that does not allow any further private rounds, and forces you into an IPO. While the IPO is not a problem by itself (see item 5), the timing should be entirely decided by optimal market appetite, not by your run rate.
3. Down-round is not a dirty word.
There is misplaced pride, no long term gain, in reaching a high paper value. If you received financing in 2015 you may find yourself at a paper value that in today’s market is very difficult to follow. While startup investors will need to get in sync with this, a down round is a healthy resetting of expectations. Think of yourself like a public company. Remember Facebook’s first year as a public company. Values go up, values come down, life goes on.
4. The FED is here to the rescue.
While we’ve seen a major shift in venture capital searching for tangible revenue and profitability instead of just growth, we do not see overall capital liquidity running dry. Good companies are getting funding, period. The rest of the country is still getting through a long recovery process and barely ready for any kind of FED rate hike. Capital is close to being handed out for free (or even at a discount in Europe or Japan) and lots of liquidity continues to be pumped into the economy.
5. Go public.
Public markets seem to be a lot saner than private markets. Adam Smith’s invisible hand appears to be keeping public tech companies to a standard we have not witnessed in the private market as of late. As much as the Q1 bear stock market drove private valuations back to earthly levels, and accelerated the slowdown in funding, an equity market recovery (as we are seeing in Q2) will realign public and private values and provide liquidity events for those who need it.
Andries Verschelden is the Managing Director of The Brenner Group, one of Silicon Valley’s premier professional services firms. He has held a variety of consulting and management roles throughout his career, including work in New York, Brussels, Shanghai, and San Francisco.
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