The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth.
Of course, you probably need that decent advice because you listened to your VCs' previous decent advice in better economic conditions - "don't worry about profit, just grow grow grow as fast as you can."
The cynical side of me thinks that it's this flip-flopping between two extremes that ends up disproportionately benefitting investors, and that entrepreneurs would be better served by always assuming economic conditions will change and preparing accordingly.
And yes, entrepreneurs are almost always better off ignoring everything an investor says and using their own data (which ought to be better than that of an investor's, otherwise why the hell are you founding a company?) to come to a conclusion.
The "Mr. Market" allegory was published in 1949, but it's never been more apropos. Pretty much all venture capital operates on this principle; use it to your advantage:
- The stock market is off 20%.
- Very few IPOs.
- Many hot IPOs are under the offering price.
- Most of the public market investors that have entered late in the game (Fidelity, etc) are marking down their positions, and holding off on new investments.
Every solid company should have a "What would we need to do to get cashflow positive?" scenario. It may damage longterm valuation (cutting growth does that) but at least it gives the existing investors an option: "We can enter survival mode and do X, or you can fund us with Y, and we can do Z"
I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. At the last, I find myself wondering if advice from VC's - especially regarding something like valuation - doesn't inherently tend to be self-serving on their part.
Remember, the objectives of a VC and the objectives of an entrepreneur aren't always aligned.
That said, you can't really argue with this part:
You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time.
Though I agree with the substance of your comment, I don't think it's a 'conspiracy theory' to expect a VC to have her percentage in mind. That's just capitalism.
Two thoughts:
1. It might. But it might not do so in the time-frame that VC's typically expect. Since funds tend to be time-boxed, VC's generally need to see not just a specific return, but they need to see it by a certain point in time. The older a given fund is, the more pressure to "do it now".
2. That said, nothing says growth has to be a smooth curve (whether it's linear, exponential, or whatever). You could be on an exponential growth path, slow down to flat, or even shrink, due to external macro-economic factors, or strategy, or whatever, then ramp back up again later and "go exponential" when things change.
and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company
3. Well if the alternative is going out of business and resulting in a valuation of 0 for everybody involved, almost any alternative is better. I see it not as a call to give up on being a "home run" but as a call to batten down the hatches, hunker down, weather the storm, and then adapt as circumstances change.
VCs hate having "zombies" in their portfolio though, no? So I'd expect them to encourage companies to keep going for it, and may the strongest survive.
Good B-2-B biz most likely still get funded.
This throws a lot of people for a loop who want one source of objective truth for everything. But markets don't work that way: they're just deals between individual people, which may or may not become public. If somebody else makes a deal that you think is absolutely crazy, it is objective truth for them but absolutely irrelevant to you.
Personal finance works the same way. I know a few folks who were momentarily multi-millionaires during the dot-com boom; then valuations came crashing down and they were completely broke. We also tend to think of the value of a dollar (in cash) to be stable, but as anyone who lives in Zimbabwe can tell you, that's not a given.
http://blog.samaltman.com/the-tech-bust-of-2015
I could drop the market cap of Google down to $3.4M right now. All I have to do is sell one of my shares for $0.01. The thing is, it would pop right back up again to $483B within a few milliseconds, and I'd just be out $690, so there's kinda no point to it.
(Pedantic note, since I know there's gonna be someone in the financial industry that corrects me: no, I couldn't, technically. When I put in a sell order, it goes into the order book, and buyers are required by law to take the best offer, which is probably more than mine. I'd have to place my order at a time when there are no outstanding limit offers. This has actually happened during flash crashes and technical glitches, but is not a normal occurrence.)
Privately traded companies are similar, but because there's less liquidity, the price doesn't necessarily correct on any reasonably time scale.
[1] https://signalvnoise.com/posts/1941-press-release-37signals-...
Otherwise, we are left believing obvious absurdities: for example, somebody who bought Bear Stearns at $60 on March 13 2008 got just as good a deal as somebody who bought Bear at $3 on March 17; Bernie Madoff's fund management services were worth every penny until his arrest; etc. There is nothing 'subjective' about either Bear's hiding of the worthlessness of its subprime books or the fraudulence of Madoff's scheme.
"The latest data from PitchBook show that VC investing in U.S. companies dipped to $9.3 billion in the first quarter of 2016, down from $17.6 billion in the fourth quarter. "There's significant uncertainty in the market right now and (we) would advise companies looking to raise capital to close quick and — while financing is available — maybe close on more capital than is necessary to be prudent in this environment," said PitchBook analyst Garrett Black. "
[1]http://www.cnbc.com/2016/02/09/silicon-valleys-reality-the-p...
How is the first quarter of 2016 measured? We're only half way through it.
Contrarian takes aren't necessarily correct by the virtue of their contrarianism.