The Valuation Hangover
Two years of excesses in the public markets radically changed the funding environment for Western startups. This has led to large upwards swings and massive crashes. Non-US companies may be better of.
In 2021, and half of 2022, startup founders in the US were the beneficiaries of the most generous funding environment in decades. Rationality was kept aside as it became easier to accept term sheets for the next round on a rumor that Tiger Global were talking to the company. Imaginary competition, between Tiger and everyone else pushed timelines down, and plans out the window. There could be no wrong. The termsheet was coming this weekend. That’s what John Curtius promised. That is until the tide started to wash out.
Series A companies with $10-$20m in the bank were still seed companies with a bigger balance sheet, a bigger team and no product market fit. These companies had no board members who knew what to do, when the company was failing. As long as the next round was guaranteed belief was suspended. Cofounder conflicts were unresolved, management focus was unfocused, and governance was glaringly missing.
As it became obvious that bad habits had poisoned the culture of these teams, turning the ship around mattered. Layoffs were required to get rid of team members who did no work and had negotiated top packages, working remotely with no accountability for business metrics. Off-sites were parties. Slack was for slacking. And OKRs stood for OK with resting and vesting. Everyone was fat and happy with more than 24 months of runway spending close to half a million dollars a month. We’ll get the series B done in 12 months. The term sheets should be as easy as the last one, we just need a little bit of revenue per month to show we are maturing. My friend just got a 1000x multiple and did a double digit secondary, we are going to get the intro next week. In fact they just emailed me. I’ll be back. Everyone was high on a level of religious optimism that has never been seen before.
Nothing could go wrong. Until the bubble popped. Stone cold and sober, it suddenly felt like a car ready to crash into the side of the motorway. A first layoff and then a second, team members looked at each other, losing their best friends in an instant. Slack being deactivated, laptops being recalled. All hands went from a song and dance, to a funeral march. Suddenly the Doordash perks were recalled. No more library allowance. The team offsite in Aruba was cancelled. Sorry we can’t afford to spend $250k on the offsite, flying in 40 people from all over just doesn’t make sense any more.
New questions were being asked. So why doesn’t anyone use the product? What do we have five key metrics and not one. We soft launched, but we’ve never really found an audience. We think people want it because they loved our Techcrunch article. Who is the persona that needs it. How we start to make back the money we are spending every month. Do we need to another layoff, because we are a zombie. How do we get profitable.
Excessive mania on funding companies has blinded a generation of founders in the US to go up and then down the greatest emotional treadmill that anyone has experienced in recent history. All by ignoring business fundamentals. Find an audience that needs you, build something that gets them to pay, and expand from there. Get profitable.. Build new products and do it again and again.
The relative difference for an emerging markets founder was that smaller budgets and a focus on fundamentals meant that their companies didn’t experience quite the same mania, meaning that seed companies that survived these last two years with growth and profits might be some of the best founders worth backing over the next ten. Its an interesting time to look outside the US again in 2023.