Venture Capital 101: How to Survive and Thrive When VC Funds Dry Up

Venture Capital 101: How to Survive and Thrive When VC Funds Dry Up

Way back in 2009, the Great Recession hit America. And it didn’t pass me by.

In case you don’t remember how bad things were, let me refresh your memory: Bear Stearns failed. Lehman Brothers failed. Merrill Lynch sold for next to nothing. Countrywide Mortgage sold for pennies on the dollar. AIG had to be propped up by the federal government. General Motors went bust, was put on life support thanks to the federal government. People were worried. They wondered whether they would go to the ATM one day and no cash would come out because their bank had failed.

And me? I was at a startup called PV Powered. We were developing the next generation of commercial and utility grade solar inverters. We had about 100 angel investors and we were burning $750,000 a month when the Great Recession hit despite as much bootstrapping as possible. The next thing we knew, 98 percent of the investors had backed out, equity stake be damned, announcing they would no longer support the company. And who could blame them?

Our survival business plan: Cut the company to the bone. We basically got rid of everyone but the engineering team. And we had two investors – a father and son – willing to stick it out. Ultimately, bootstrapping on steroids worked and the company was saved. We didn’t end up with an IPO, but we did sell it for a very high multiple a few years later to Advanced Energy, a public company.

When Venture Capital Dries Up

I’d like to say that mine is a cautionary tale. But it’s not. The truth is that portfolio companies have very little control over how VC firms’ general partners will respond when the economy starts to go south. It really had little to do with our management team in 2009. And it has little to do with you today.

In fact, global inflation, the war in Ukraine, and the lingering economic impact of the pandemic are all contributing to a slow-down in venture capital funding.

CrunchBase says that VC investment in startups in the second quarter of 2022 was down 27 percent compared to Q1 2022, and down 25 percent from the same quarter last year. As an example, early stage accelerator and investor Y Combinator says its Summer 2022 cohort consists of less than 250 companies, down from more than 400 on last Winter’s list – a drop of 40 percent, reported The Register. No doubt this lack of enthusiasm will trickle down to limited partners at accelerators and early stage funds as well.

So what’s an entrepreneur to do when raising venture capital is no longer an option? We asked two experts, Cleve Adams and Brian Rosenweig, for their advice.

Belt Tightening 101

Conserving cash is, of course, the first thing to do, says Cleve Adams, CEO of Acquicore, an ESG data and analytics platform. That requires doing all of the standard things such as a hiring freeze, getting rid of the consultants, paring management salaries, and looking around to see which low-performing employees you can cut to save money.

But, Adams, who had a billion dollar IPO with Websense, and then went on to four successful company sales over his executive lifetime, says there are other creative ways to conserve cash too. One of his successes: Ending an office lease and moving to WeWork space. That one saved him $50,000 a month on rent.

Get Realistic

Brian Rosenzweig, a General Partner at Joule Ventures, says he’s been surprised by the speed the venture capital markets have changed, which has caught a lot of founders off-guard.

“A lot of founders were saying, ‘I’ll just go out and raise money in Q3,’ and then, all of a sudden, the bottom drops out and they find out that their metrics don’t warrant a Series A or Series B or a Series C anymore. So there’s a lot of scrambling for capital.”

He’s seeing entrepreneurs still peddling term sheets with high “aspirational valuations” for their companies, which can scare off institutional investors who are re-prioritizing metrics and thorough due diligence. “And I look at them like, ‘Dude, your job is to make sure that you have cash.’ Right now, it’s about survival not optimizing for pricing.”

Ratchet Up Revenue

When you’ve cut to the bone and there still isn’t enough cash flow, maintaining liquidity requires more income. So that’s the next focus for Adams.

“Revenue cures all ills, right?  If the revenue was higher, they wouldn’t have had to get more money from venture capital.  They wouldn’t have had to lay off 100 employees. So, I look for ways to revitalize sales.”

Sometimes You Have to Bite the Bullet

There is still a lot of money chasing relatively few investment opportunities, Adams says. So you can go to your private equity investors or venture capital firms and ask for more. Just know that the terms will favor the investors, not you.

It’s likely to be a different type of investment — participating preferred debt, maybe at sky-high interest rates, maybe at a 40 percent discount to the next funding round – all structured by the fund’s general partners do everything possible to ensure their limited partners at least get their funds back, if not registering a sky high win in the end for both LPs and GPs.

Mind Your Own Business

Rosenzweig, who has been a seed investor for more than a decade says he now sees entrepreneurs “doubling down on product, product excellence, and product market fit,” in order to drive growth and be better positioned for their next raise.

He’s also seeing companies looking beyond their standard market ecosystem to find new opportunities and revenue streams.

“There’s a lot of startups out there aiming their products at high growth, B2B, SaaS companies – all the sexy, big venture backed companies,” he says. “Those are the companies that are going to be hurting the most in this market. Companies do themselves a favor by diversifying their customer base to include some more stable companies. That will help in terms of mitigating the risk of your revenue pipeline drying up.”

Cement Partnerships with Your Customers

Dan Sullivan, founder of the Strategic Coach program, says that when times get tough, it’s time to have a DOS conversation with your customers and prospects. DOS stands for Dangers, Opportunities and Strengths. It’s something like the SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis so popular in business school.

A DOS conversation is a way to analyze your customer’s situation with an eye towards:

  • What are our strengths? What are the things we do well, no matter what?
  • What dangers do we face? Looking at the current situation in the cold light of day, where are we at, and what’s coming at us that could be devastating?
  • Where are our biggest opportunities – what should we do, and capitalize on, right now?

That’s how you gain clarity and confidence to take on whatever circumstances the world throws at you – by being of the greatest service right now to your clients and customers – knowing how you can help solve their dangers and turn strengths into great opportunities. And executives at portfolio companies can earn bonus points by having the same kind of DOS conversation with the general partners at the fund that’s backing them, and further understanding the dangers, opportunities and strengths those funds’ limited partners face.

When you have those conversations, Sullivan says, something great is always going to happen, no matter the economic weather.

About the Author

Robert Jordan

Robert Jordan is CEO of InterimExecs, matching organizations around the world with executives who specialize in growing and transforming companies. Jordan got his start in business by launching Online Access, the first magazine to cover the Internet, landing on the Inc. 500 list of fastest-growing companies. After selling Online Access, Jordan took on interim CEO engagements and authored a book of interviews with 45 company founders who had created $63 billion in value from scratch, titled How They Did It: Billion Dollar Insights from the Heart of America. He is the publishing partner of Start With No (RandomHouse), a best-selling book on negotiation and is a graduate of the University of Michigan and the Kellogg School of Management at Northwestern University.