On October 21, 2011 at 10:20 a.m. I joined more than 8.5 million other Californians for the Great Shake Out, an annual earthquake preparedness drill. Four hours later, the Bay Area was jolted by a temblor that measured 3.9 on the Richter scale.
Even though we’d just been trained for exactly this scenario, many colleagues didn’t know how to react: a few panicked, others braced themselves in doorways, and a number of people simply ran for the exits.
When the unexpected happens, no one knows how they will respond. That holds true in a downturn, too. Many first-time founders think they know where to look first to save money or how to pivot, but as the saying goes, no plan ever survives first contact with the enemy.
Basic best practices will not help your company endure this winter, so I invited M13 managing partner Karl Alomar to join me on a Twitter Space to discuss the following:
- Using “ruthless prioritization” to find proof points
- Investors still expect “healthy growth”
- Why founders need to secure 24+ months of runway
- How to talk to your investors about pivoting
- When it’s OK to leave money on the table
- What you need to do differently to fundraise during a downturn
Based on his time leading startups through the dotcom implosion in 2000 and the 2008 Great Recession, Alomar said it’s critical for founders to be strategic and not reactive.
To secure funding right now, you have to be a significantly outperforming business. Karl Alomar, managing partner, M13
Whether or not you feel like a leader, “the decisions you make in your business are going to affect all the people that work for you, so you have to be able to manage and communicate across all those stakeholders very effectively,” he said.
Using ‘ruthless prioritization' to find proof points
Alomar said M13 works with founders to identify “proof points” companies should execute against before raising their next round.
“There's a difference between proof points, which are things that you have to build between rounds, and just validation of the business quality,” he said. These criteria vary, but could include product-market fit, engagement metrics, or specific initiatives that will help meet business targets like ARR or burn rate.
“If you're a fintech business, you need to make sure there's a good supply of capital. If you're a hardware business, you need to make sure that the supply chains are clearly demonstrated to work,” he said.
In this normalizing market, Alomar said investors are searching for startups making “incremental” improvements so they can reduce their risk from previous investments. As a result, everything is up for consideration, including the makeup of the leadership team itself.
“There's some businesses where you feel like the founders are just the right people to build it right up until it gets to true growth stages,” he said. “So if you just did a round [of] investment and you have a fantastic founding team, you may not have a proof point on management, because people may already believe in your team.
But if you had a great idea, and everyone feels as though there's a lot of maturation required in the business, one of your proof points might be: ‘Hey, we need to build a management team that can take this business to the next level.'”
Investors still expect ‘healthy growth'
Despite the downturn, Alomar said investors have not lowered expectations when it comes to early stage growth.
“Right now, you actually need to perform better — more efficiently, more effectively,” he said. “To secure funding right now, you have to be a significantly outperforming business.”