Venture Capitalists’ Best Advice for Tech Startups in an Economic Downturn

• VCs are writing to their portfolio companies to warn them of the turbulent times ahead. 
• Investors are advising startups to cut costs and conserve their cash. 
• Some VCs say this is the best time to start a company and emerge stronger for the long-run.

The moment of reckoning VCs have been dreading might finally be here. 

After investors poured record-breaking amounts of venture money into startups this past year, a spate of disappointing performances from tech companies has investors anticipating a slump, with startup valuations beginning to drop. 

Data from CB Insights pointed to an expected 19% decline in global-venture funding for the second quarter. Sectors that typically excite VCs could also see less funding. CB Insights said fintech funding would see a 28% drop,

digital health

would see a 25% drop, and retail tech would see a whopping 50% drop. 

Startups like Thrasio, Cameo, Noom, and MainStreet are turning to cost-cutting, layoffs, and even looking for buyers. 

Like other downturns, including the one at the beginning of the pandemic, investors sought to assure their portfolio companies that things would work out while warning them to brace for turbulent times. In the financial crisis of 2008, investment titan Sequoia Capital  famously cautioned founders to cut costs, and “spend every dollar as if it was your last,” in its “RIP Good Times” report to its portfolio. The firm delivered a similar message to startups as the dot.com bubble burst in 2000. Sequoia just issued their own warning to their portfolio about the recent downturn, cautioning founders of this “crucible moment,” in which they need to cut costs and conserve cash. 

Many VCs are drawing inspiration from Sequoia’s infamous 2008 pitch deck, cautioning founders in internal and external memos to prepare themselves for the downturn. 

Many of these warnings came in memos, but some VCs preferred to speak directly to founders. 

For example, Ammar Amdani, the cofounder of Adapt VC, says he’s been scheduling meetings with all his companies to address their financial needs in the months ahead. Carter Reum, founder of M13 Ventures, also says he’s been communicating individually with each of his companies. 

Here is a round-up of what some VCs have told portfolio companies about how they should prepare for a continued downturn.