Insight Partners VC helps founders cut ‘fluff’ to ride out lean times

Insight Partners has a team of about 100 operating experts singularly focused on helping the venture capital firm’s portfolio companies grow as fast as possible—at least up until earlier this year.

But since technology stocks sold off, the Insight Onsite team, led by managing director Hilary Gosher, turned its attention to advising startups on how to conserve cash, grow more efficiently and strive for profitability.
 

Gosher acknowledged that some of the several hundred portfolio companies her group advises may have overhired and accumulated what she called “fluff in the system” during the abundant funding environment of the previous couple years. Her team has been helping startups rein in needless expenses. “I could be spending $1.50 to get $1 worth of revenue in ARR, whereas if I was in a more efficient mind frame, I might spend 90 cents to get that dollar of revenue,” she said.

PitchBook spoke with Gosher about her team’s advice to startups on approaching layoffs, runway extension and repricing of employee stock options.  

Insight Partners is one of the largest and most active venture investors. Founded in 1995, the firm is currently investing out of its $20 billion flagship fund, which closed in February, and has reportedly begun to raise another $20 billion vehicle. Insight Partners invests primarily in software companies, including fleet management software maker Motive, stroke detention platform Viz.ai and Papaya Global, a provider of payroll and HR tools.

This interview has been edited and condensed for clarity.

PitchBook: For what advice have your portfolio companies turned to you most frequently this year?

Gosher: One of the most important questions companies ask is, “is it better to do a hiring freeze or lay off staff?” We tell them that the answer depends on how efficient the hiring process was. If they were hiring very quickly, chances are they probably hired some less-than-optimal performers. In that case, it’s probably better to do a small layoff and then hire back slowly as the company grows. Other companies decide that it is better for company culture and morale to do a hiring freeze.

What departments or roles are seeing the biggest layoffs?

Engineering is one department that is protected at all costs. Engineers have been such a scarce resource that companies are always playing catch-up on hiring them.

But companies may not keep as many recruiters if they are not hiring as fast. They are also consolidating offices and territories. Instead of having five sales representatives in five territories, they might decide to have three representatives sell the product from three territories.  

Instacart and Stripe have recently lowered 409A valuations supposedly to make stock options more enticing for employees. Are you advising your portfolio companies to take similar steps?

From my point of view, revaluing options is extremely disruptive for employees and everybody else. In most cases, employee attrition is not related to underwater options since they won’t be realizing their value now anyway. Employees are usually leaving the company because they don’t believe in the future of the business. Smart CEOs need to show their employees that the company has enough runway to grow into its 409A valuation.

What’s your advice on balancing growth with the need to become profitable sooner than previously expected?

People are now definitely indexing on companies that are driving towards profitability. That’s why we now say, “Spend less and grow slower.” It’s a trade-off.

As for the growth rate, we tell companies to assume that six to 10 times the valuation multiple is what they will get on their next funding round. They have to figure out how much revenue they need to get a valuation greater than the one they got in the previous valuation environment and work back from that revenue number to find their growth rate.

What is the average runway of your portfolio companies?

It’s long. We are finding that there really isn’t a financial crisis out there.

Many companies raised a lot of money last year. Most of our companies also doubled the runway versus where it was last year. They had to increase it because they didn’t know the next time they would be able to raise another round.

They may have cut costs, but in many cases, they just won’t spend as much as they anticipated they would. In other words, companies are more prudent about their future spending. New initiatives and vertical expansions are being put on the back burner.

What stages or sectors of the VC market do you think are the most challenged in this environment?

Companies that are at Series A and will need to raise a Series B, or at Series B and will be going for their Series C, will struggle the most and may be forced to take down rounds. That’s because some companies do not have sufficient revenue traction at those stages.
 
Another red flag is companies that sell primarily to other tech companies. Since tech companies are all cutting costs, they won’t be buying software at the same rate as before.

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