Saturday, February 4, 2023

Think long term, take off and watch the runway: This is what European venture capital funds advise their founders in the face of an impending recession

Sequoia Capital’s 2008 “RIP Good Times” presentation is well known.

in the middle Financial CrisisPowerful company partners presented scenarios of tough economic times ahead.

Whenever the economy falters, the iconic presentation resurfaces. It details what went wrong with 2008 And, more importantly, how Sequoia’s portfolio companies were able to hold up during the downturn. The advice at the time was: respond quickly, cut costs, be realistic with valuations and keep at least a year’s margin in the bank.

“It’s general advice,” he tells WebMD. business Insider Arne Morteny, partner at Kiko Ventures, though, says it’s still true. “Because people are so programmed with the good old RIP stuff, sometimes you miss the nuances.”

In some cases where a company’s underlying market is still strong and it can be obtained through a land grab, cost-cutting and the workforce may actually be eliminated. doing more damage He’s good, according to Mortney.

“If you reduce the cash outlay, you lose the opportunity to acquire land,” he says. Companies can. Take Advantage of the Recession to “Clean Up” When your competitors falter, he added. In these cases, Kiko does not recommend pruning.

This is in stark contrast to the rest of the sector, where layoffs have been frequent. According to Adam Nivinsky, partner at OTB Venture, companies can reduce their workforce and costs by up to 30% and continue to grow.

“It’s never easy, it’s never nice, but sometimes it’s really necessary for a company to survive during a downturn,” he says.

Backing portfolio companies during a recession is tough: Founders ‘aren’t enthusiastic’ to embrace investors a more practical approachBut are open to taking some advice, he said.

“That’s the value of mentorship,” says Nivinsky. it must share the lessons learned and be honest with the company: It will have difficulty over the next year, or at least in its objective assessment, and must work to balance growth and consumption, he insists.

companies are encouraged to focus on their long term vision,

“The world is ready to think more in the long term, rather than the fact that we are in a difficult situation now,” says Ekaterina Almosque, partner at OpenOcean.

Almosque helps its portfolio companies realize resilience by focusing on high-level goals. Magda Lukaszewicz, director of Balderton, echoed the idea, even though it may take longer for companies to reach those goals.

2023 is full of unknowns

There is a possibility of getting worse before the situation gets better. It remains to be seen what will or will not appeal to investors in 2023, said Mitchell Kotting of Northzone.

In March, Cotting advised his companies that they should have 2 years of margin, ideally 3. It is based on the assumption that the business will continue to operate, which may not be the case if the economy is suffering.

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“It cannot be so, and therefore your room for maneuver It can be supposedly longer than it actually is, so be careful with that,” he stresses.

Investors are also re-evaluating the business model: If it’s not a “bankable” business, it has to break even, Cotting says. This coincides with the general turn of the technology sector cost effectiveness vs development.

The longer a business has been in business, the more time it has before going to the market to raise money again. According to Antoine Moyraud, a partner at Lightspeed Ventures, some were considering an internal bridging or expansion round to extend the term further, but the capital has already dried up.

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“Now, in these later stages, founders are considering going to market regardless of their circumstances, simply because they have no other option,” he says. “Even the big companies of 2021 will struggle and suffer evaluation haircut If they are not at the top of their game,” he said.

Still, money will flow to businesses next year. According to venture capital funds, this is partly due to declining multiples — which means it’s a great time to be an investor — and the end of deployment cycles. However, they still need to make a profit for their own investors, called limited partners.

Sequoia’s “RIP Good Times” ends on a sad note: be real or go home (Be realistic or go home.) The new reality in Europe is one that both investors and startups must brace for.

Nation World News Desk
Nation World News Desk
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