SmartAB™ Wisdom #11: Never Give Up — Even During The VC Carnage of 2022…
The ever-growing predictions of the upcoming recession are not making the fundraising process any easier. And I already spoke about the Dotcom Crash, or “The Mother Of All VC Crushes” in my post: SmartAB™ Wisdom #9: Apply The Sutton Rule To Survive The Venture Capital Crash…
So, nobody was really surprised to see the latest CB Insights VC report confirming the worst fears such as:
· $108.5B — Total funding for Q2’22. Down 23% QoQ
· Retail tech funding plummets 43% QoQ to hit $13.2B
Even on a good day, Venture Capital is a tricky business:
• Less than 1% of all submitted business plans ever get funded
• Less than 10% of all funded ventures ever succeed
Hence, no wonder that with the present macro and microeconomics headwinds, the challenges of avoiding startup failures are 10X if not 100X greater than a few years ago.
And according to CB Insights: “Running out of cash, tied with the inability to secure financing/investor interest, is the top reason startups cite for their failure”.
In my post: Plan B Ventures — The Last Call… I mentioned that more than 2000 years ago, Hillel The Elder, provided the most succinct summary of the Old Testament. His short answer is commonly known as The Golden Rule and is quoted as: “Don’t do to others what you wouldn’t want others to do to you — the rest is commentary”
Well, since “the rest is commentary” is one of the most widely used business quotes of the 21st century — I also asked myself a few questions about what can be done to avoid startup failures in 2022? And IMHO, the aggregate of all such root causes boils down to the following:
There are too many brilliant teams with lousy business models left to their own devices…
Unfortunately, the graveyards of innovation are full of brilliant technologies with lousy business models. And more often than not, even the most promising executions fail when there is no proper balance between REVENUES and PROFITABILITY…
You can find more info in my post: SmartAB™ Wisdom #10: Follow This Simple Recommendation & Win — It’s Easier Than You Think. This is what I said:
“And it’s not just the Revenues. Profitability is the key word here, as revenues without profitability can be deceiving… In a long run, you can’t be just a little bit profitable the same way you can’t be just a little bit pregnant. The lack of profitability is not sustainable…
It is the 1999 dotcom crash that taught us the importance of profitability. And the VC crash of 2022 is once more — emphasizing the same. The experience of going through such VC bubbles and surviving the downturns, counts.
When VC bubbles burst, the GPs disregarding the dotcom wisdom will be unmasked as mediocre clowns of a VC circus. Simply put, when the big tide floats all the ships, it is easy to focus on the company’s revenue growth without paying too much attention to the lack of profitability”.
Simply put, without balancing Revenues & Profitability, even the Unicorns crash & burn. Nobody can rely for too long on “imagine the future” narratives & hand-waving…
And inevitably, we will see once more too many startups “throwing in the towel”. I am referring to early-stage VC-backed startups that operate without any threat of liquidation for at least another 12 months — and yet: call it quits.
They capitulate, quit in defeat, admit failure, and return whatever cash they have left to investors…
The Towel-Throwers (TT)
In general, I see the following commonalities behind all such ventures:
· Seed-Stage Investment is about to run out in 9 to 12 months….
· The Business Model doesn’t work…
· Running out of ideas and out of time…
· The company is sinking, fast…
· The BOD agrees: it’s time to quit, fire everybody, and return the remaining capital to investors….
In a nutshell: the TT company is running out of time AND out of money!
Don’t get me wrong, finding the right business model is difficult even for a well-capitalized and thriving company. And HBR article: “Kodak’s Downfall Wasn’t About Technology” — states clearly that even Kodak was not disrupted by Digital Technology but by its inability to understand and embrace the new Business Models that came with it…
We all understand that VCs under a lot of pressure have to make a lot of hard choices. Can VCs afford time and money to look for the root cause of each failure? Of course, not, they can’t.
Instead, they focus only on “quick wins” and “bright spots” in their portfolios. So, they try to replicate the “bright spots” as much as they can — to the detriment of abandoning TTs. In essence, the bright spots tell us the following:
· Logic Without Emotions — Lacks Motivation & Passion
· Emotions Without Logic — Often Lead In A Wrong Direction
Apply Both & Win!
However, early-stage seed investment is nothing but an educated guess. As one of the most respected and inspiring VC experts, Steve Blank, says: you can call it a “hypothesis,” but it is just a fancy word for “guess. After all: “a startup is just a temporary organization, designed to search for a repeatable and scalable business model”.
According to Steve’s most elegant and concise explanation: Lean Startups should follow a simple 3-stage process:
· First, you search for a repeatable and scalable business model
· Be prepared for multiple iterations and pivots to find the right product/market fit
Most TTs never pass the Search stage and become disillusioned by the difficulties in finding an inexpensive, predictable, scalable, and profitable sales channel. Their sales force is not able to justify Customer Acquisition Cost (CAC)… and TTs run out of money…
Thankfully, truly ambitious, tenacious, hard-working founders, are never at ease at admitting defeat. The know that when the executions fail and the grand visions turn into hallucinations — the dreams of wealth become the nightmares of poverty in a heartbeat…
They faced a real possibility of losing it all, firing the entire team, and closing the doors — for good. So, after going through such adversity, they are much more receptive to outside-the-box thinking and more open to receiving advice…
My point: don’t let emotions overrule your logic. It happens more often than you think. Just look at the brilliant description of the elephant rider phenomenon by Heath Brothers: “When you spook an elephant, no amount of logic, carrots or sticks, is going to help. The rider just goes with the flow and hopes for the best”…
So, if you are disappointed, and your once mighty unicorn begins to resemble a single-horn pony — perhaps it’s time to embrace outside advice and steer clear from a product offering with unscalable business models…
Leveraging the help of Outside Advisors is the best KEE (Knowledge, Experience & Expertise) to avoid heavy losses and unlock the success doors to maximize the winning probabilities…
Instead of looking for yet another VC Survival Guide that tells you how to preserve the cash and trim expenses — “get out of the building” and talk to the advisors that experienced the dotcom crash.
When companies are laying off employees or evaluating the possible bankruptcy, considering new business models might be not only prudent and the right thing to do — but also highly therapeutic and soothing. It surely beats the blame game and finger pointing…
After all, there are only two rules to survive the VC Crash of 2022:
· Rule #1: DON’T PANIC
· Rule #2: Never forget rule #1
For More Information
Please see my additional posts on Linkedin, Twitter, Medium, and CGE’s website.
AI Boogeyman
You can also find additional info in my book on amazon: “AI Boogeyman — Dispelling Fake News About Job Losses”, and on our YouTube Studio channel…
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