Trouble Is Brewing for Startups. Here’s What to Do to Prepare.

• Bradley Tusk and Jordan Nof are managing partners at Tusk Ventures. 
• They say the environment for startups is becoming increasingly difficult. To adapt, founders need to do these key things. 
• They say founders should consider fundraising earlier, cutting expenses, and rewarding valuable employees with stock. 

It wasn’t that long ago that the venture-capital ecosystem felt truly out of control. VCs quickly adapted their due-diligence processes and became comfortable funding startups without any in-person interaction. The efficiencies gained by fundraising over

Zoom

became most pronounced in how quickly rounds of financing could come together. The market dynamic was further exacerbated by VC firms, which also benefited from raising capital remotely and are now looking to deploy record amounts of dry powder.   

In Q1 2022, we saw public-market valuations pull back and the window for initial public offerings slam shut. While growth-stage businesses saw valuation multiples compress almost immediately, the effect on early-stage VC is less clear. Valuations haven’t come down materially, but VCs have clearly begun to refocus on fundamentals. Many VCs welcome the return to this regularly scheduled programming.

For some founders, getting used to this new environment may be challenging. We’ve offered some guidance below to help founders adjust to this new market environment. 

Start fundraising much earlier

First, start your fundraising process earlier than you anticipated. As a founder, you should plan for the funding process to take a bit longer than it did in 2021 because investors now have the time to ask tougher questions and spend longer on diligence. You should also plan to raise enough capital to provide your company with 24 months of runway. 

Figure out where you can cut your expenses

Second, scrutinize your burn rate, and cut back where you can. It’s likely that the expenses associated with your company have grown over the past few months, especially if you’ve increased your head count. Knowing what levers you have to extend your cash runway is imperative. 

Communicate with your board more regularly

Third, increase the cadence of communication with your board. When times get challenging, that is when you should be spending the most time with your investors. The market is changing, and a strong board may help you navigate the uncertain times ahead and any potential threats that may affect your business. Investors join your board for a reason. 

It’s a competitive labor market: Reward your best talent with additional stock

Fourth, ensure that your top performers are strongly incentivized to remain with your company. Strive to further align incentives with company success by rewarding talent with additional stock-option grants. Despite the market uncertainty, remember that we’re still in a competitive labor market, and employees have plenty of options. It’s important to remember that nobody wins by paying employees less than the market rate. It’s bad for morale, culture, retention, productivity, and future recruiting efforts. 

Cut your workforce sooner rather than later

Finally, if you must make cuts to your workforce, do so sooner rather than later. This may ensure that your remaining employees can focus on doing their work instead of worrying they’ll be laid off. Also, reduce your workforce enough to move the needle. You won’t hear many founders saying they learned a lesson about cutting too deeply. 

Overall, we believe that this change is necessary for the tech and venture ecosystem. Founders need to remember that companies aren’t built overnight, and the best companies are those that are diligent in raising capital and building their products. 

Founders with truly groundbreaking ideas will continue to succeed, continue to secure high valuations, and continue to win favorable deal terms. But founders who acknowledge that the VC funding environment has changed, and are prepared to change with it, will be rewarded in the long run.