VC Firm IVP Warns Startups to Cut Costs, Extend Runways in a Downturn

• In a new presentation, the VC firm IVP tells startup leaders to batten down the hatches.
• The market bottom is still months out, and access to venture capital will remain strained.
• Insider has exclusive access to the firm’s deck, titled, “Thriving in a Bear Market: A CFO’s Guide.”

One of the tech industry’s oldest and most well-heeled venture-capital firms has issued a gloomy forecast: The markets are nowhere near the bottom and portfolio companies need to “surgically pare down expenses” while still investing in growth in order to thrive.

In a 10-page deck shared with Insider, the firm IVP warns that a public markets downturn that has decimated tech stocks over the past nine months will likely stretch another nine months. That has ripple effects for venture-backed, private companies that rely on outside investment to operate and grow. Founders should expect lower valuations and closer investor-scrutiny as the downturn drags on.

“What the private markets said you were worth a year ago may no longer be relevant going forward,” the presentation reads.

General partner Ajay Vashee and partner Michael Miao presented the deck to finance executives of the firm’s portfolio companies last week at a private dinner in the San Francisco Bay Area. Insider is sharing an abridged version of the deck with IVP’s permission.

The firm’s new edict follows a string of similar memos from investors like Andreessen Horowitz and Y Combinator. After years of telling founders to grow at all costs, investors now urge founders to cut spending and extend their runways to “avoid a death spiral,” warned Sequoia Capital in a presentation to its founders.

Founders need to spend more cautiously as the frenetic pace of venture dealmaking slows, Vashee and Miao said. In the first half of 2022, venture firms raised $83 billion in new funds — the highest amount over a six-month period for the industry, according to a recent report by Silicon Valley Bank. But the partners say founders will have unequal access to those funds, with money flowing more readily into early-stage startups and existing portfolio companies.

“As we look at this dry powder, you can be lulled into a false sense of security just by thinking there’s a lot of capital available,” Miao said.

“It is very good news that there is this much capital on the sidelines,” he added, “but it’s going to be much harder to access.”

‘Back at the status quo’

Investors will also insist on more rational valuations for high-flying startups. According to the deck, the last time public software companies traded at current levels, in 2017, venture investors priced private software startups at about 15-times their current annual recurring revenue. That’s down from a 114-times multiple in 2021.

Deals will also take weeks to close, not days, as the market saw when crossover-investing funds like Tiger Global Management and Coatue Management barged on the scene. “Now we’re back at the status quo,” Miao said.

The presentation encouraged a balanced approach to curbing costs and extending runways. While they should remain conservative around spending, the deck said to “ignore the urge to radically slash costs.” They risk turning off growth if they cut too deep, Vashee told Insider. And it’s important for companies to maintain growth and invest in new products and initiatives in order to stay competitive.

“The market environment is definitely going to favor companies with real market differentiation,” Vashee said.

Now read the deck from IVP, shared with its permission.