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The Lion’s Den, Vol. 1 - "Survthriving" a Downturn
4 key pieces of advice I share with my portfolio companies to navigate the first downturn in over a decade
So I decided to start writing and to share my thoughts on everything tech- and finance-related. If you’re reading this you are probably a tech founder, investor, institutional asset manager, banker or some combo of those. And you’re someone whose opinion I value so if you find this content interesting, feel free to subscribe and share with others.
Why did I decide to write? Well, I spent the past decade working in San Francisco and Israel, two of the hottest tech scenes in the world. For many years I advised the world’s best tech companies on ~$40B of deals and key strategic events (IPO, M&A, financing, activism defense, etc.). I then returned home to Israel and traded my branded Patagonia vests (the “2016 tech symposium” is a great seat cover these days) and Allbirds shoes for a black t-shirt and jeans (still wearing Allbirds TBH) and have invested >$130M in the past ~2 years in some of Israel’s best late-stage companies. After advising and backing numerous companies, serving on multiple boards and even almost launching a SPAC (there just weren’t enough out there at the time…), I feel like I have some interesting perspectives to share.
I plan to write about public and private markets, growth and private equity investments, trends I look for (or avoid) as an investor, Israel as a tech scene and, of course, a walkthrough of interesting companies I invest in. I’ll keep it to a 5 min. read - Let’s go!
Wall St., we have a problem…
I’m no macro economist but it’s pretty clear we are not experiencing a minor correction in the market but rather entering a new economic reality for the first time in over a decade. The difference this time is that the US seems more vulnerable (economically, intra-politically, geo-politically) and with fewer tools than ever to address this challenging period. Years of spending into a massive deficit were super-charged during COVID and led to ~$30 Trillion of debt (yes, Trillion with T), surpassing the country’s GDP. At this rate, the Dept. of Treasury thinks Debt/GDP will reach >7x(!) by 2096, which is crazy…or more professionally put, not sustainable.
This will require policy changes, less spending, less $$ printing, etc. In the meantime, the Fed is utilizing interest hikes to slow the inflation but so far rate hikes have been relatively moot (basically started raising rates from an unprecedented 0%. Hikes of 0.5-1% in a 8-9% inflation (it’s actually >10% if you look beyond CPI) are not that meaningful). Some of you may remember/know that 40 yrs ago, Volker raised rates to ~20%(!!!), which lowered inflation but led to a recession. We’re not there yet.
In my little microcosm of tech there’s a bit of a dissonance in terms of what’s about to happen. On one hand, digital transformation, transition to the cloud, automation and all the other trends we know about continue to be front and center in every industry and that won’t change. On the other hand, the funding frenzy of 2020 & 2021 is over, especially for later stage companies. In the last few weeks I’ve heard about term sheets being pulled or tweaked to include terms that would never work just 6 months ago and are now the norm. Personally, I view this stampede of investors away from growth companies as exaggerated, creating great opportunities for investors like myself in both the public and the private markets, but that’s a topic I’ll cover separately. The world has changed and founders and boards are gradually understanding that cash management and burn are the main KPIs of the next ~12-24 months - not just for valuation purposes, but for survival.
So where do you turn in a downturn?
It goes without saying that if growth companies can avoid fundraising in the next 12-15 months, good for them. For some companies, that’s just not an option. In the past 90 days, I’ve been spending time with my portfolio companies, companies I advise and founder friends and have been sharing the following advice based on my experience and using real-life examples:
Don’t believe your own cash runway - Whatever runway you think you have, it’s shorter. If you think you have 24 months, you probably only have 12-18 months. Fundraising takes time and effort (now more than ever), budget miscalculations happen all the time and it’s hard to assess how an economic slowdown will affect sales pipeline, pricing, retention, etc. You will attract all the wrong attention (or no attention at all) if you’re raising money on your last dollar. ~10 years ago, I was advising Jawbone (basically Fitbit before there was Fitbit). The company raised a ton from the best VCs, burned even more and kept waiting for the next infusion to come. Waiting too long and not managing burn caused it to eventually raise burdensome “vulture capital” and debt that ended up killing a promising business.
Shut down nice-to-have initiatives - This means you ditch that cool feature you were excited about for no real reason / one client asked for / you saw a competitor launch. Instead, focus on what you know is a “must-have” for your clients. During the height of its growth phase circa ‘14-’15, Dropbox bought and developed a bunch of cool tools that users liked but weren’t making any money and didn’t have a good synergy with its core offering (remember Mailbox for better email UI? Carousel for managing your photos?). When funding/cashflow became tighter, management made the right (albeit painful) decision to ax these before it was too late, which eventually led to a $1B IPO in 2018, the largest ever SaaS IPO at the time.
Trim the fats - During a bull market with available capital and 0% interest, companies tend to focus on whatever fuels growth and put less emphasis on cash management, even if it’s for low-hanging fruit. In my experience, 95%+ of VC-backed companies with >200 employees have meaningful cost redundancies and this is a good time to “lose weight”. Practical examples include unused office space (or unnecessary footprint in non-core markets), position duplication, people who stuck around from the early days but no one’s sure what they do, overload of software tools, internal processes that need fixing, etc. Several years ago, I advised a software company that had 4(!) ERP instances acquired through M&A that were expensive to maintain and painfully not integrated. Fixing that saved tens of millions a year. Even seemingly small changes can add up and be real difference-makers. Now is the time to look inward and figure out the right diet for your business.
Diversify capital structure (sooner rather than later) - Equity is always expensive, but even more so in times like these. Companies should think about putting a credit facility in place with relationship banks. If you don’t draw on it, the commitment fee is minimal and if you do, it’s still much cheaper than equity. Getting a credit line in times like these is a bit like buying an umbrella - you want to do it way before it starts raining. If a meaningful capital infusion is needed, equity-linked securities like a convert could make sense. They’ll usually have some discount to IPO/next financing, a modest coupon and some conversion minimum but these investors don’t usually take board seats and will be happy with 10-15% IRR. This type of security could also remove the need to set a new (potentially lower) valuation, which would generate negative PR, impact 409A for ESOP, etc.
Economic downturns provide a real opportunity for management teams to refocus, rightsize and figure out what in their company/product creates the most long-term value for customers, employees and shareholders. As Churchill once said, “Never let a good crisis go to waste”.
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