VC firm IVP warns startups to cut costs, extend runways in a downturn

  • In a new presentation, VC firm IVP tells startup leaders to batten down the hatches.
  • The bottom of the market is still months out and access to venture capital will remain tight.
  • Insider has exclusive access to the company’s deck, titled “Thriving in a Bear Market: A CFO’s Guide.”

One of the tech industry’s oldest and most agile venture capital firms has issued a bleak prediction: Markets are nowhere near the bottom, and portfolio companies must “surgically cut expenses” while still investing in growth to thrive.

In a 10-page deck shared with Insider, firm IVP warns that a public markets slump that has decimated tech stocks over the past nine months will likely last another nine months. This has ripple effects for venture-backed private companies that rely on outside investment to operate and grow. Founders should expect lower valuations and closer scrutiny from investors as the recession drags on.

“What the private markets said you were worth a year ago may no longer be relevant in the future,” the presentation says.

General partner Ajay Vashee and associate Michael Miao presented the deck to finance executives of the firm’s portfolio companies last week at a private dinner in the San Francisco Bay Area. Insider shares an abridged version of the deck with permission from IVP.

The company’s new order follows a series of similar memos from investors such as Andreessen Horowitz and Y Combinator. After years of telling founders to grow at all costs, investors are now urging founders to cut costs and expand their runways to “avoid a death spiral,” Sequoia Capital warned in a presentation to its founders.

Founders need to spend more carefully as the frenetic pace of dealmaking slows, Vashee and Miao said. In the first half of 2022, venture capital firms raised $83 billion in new capital — the highest amount in six months for the industry, according to a recent report by Silicon Valley Bank. But the partners say founders will have uneven access to those funds, with money flowing more easily to early-stage startups and existing portfolio companies.

“As we look at this dry powder, you can be lulled into a false sense of security just by thinking there’s a lot of capital available,” Miao said.

“It’s very good news that there’s so much capital on the sidelines,” he added, “but it’s going to be much harder to access.”

“Back to the status quo”

Investors will also insist on more rational valuations for startups. According to deck, the last time public software companies traded at current levels, in 2017, venture capitalists valued private software startups at about 15 times their current annual recurring revenue. That’s down from a 114x multiple in 2021.

Deals will also take weeks to close, not days, as the market saw when cross-investment funds like Tiger Global Management and Coatue Management entered the scene. “Now we’re back to the status quo,” Miao said.

The presentation encouraged a balanced approach to cost containment and corridor expansion. While they should remain conservative on spending, the deck said it “ignores the desire for radical cost-cutting.” They risk disabling growth if cut too deeply, Vashee told Insider. And it is important for companies to maintain growth and invest in new products and initiatives in order to remain competitive.

“The market environment will definitely favor companies with real market differentiation,” Vashee said.

Now read the deck from IVP, shared with his permission.

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