4 Ways That Tech Founders Can Control Their Destiny During Uncertain Times
When you look at current events, it’s easy to comprehend why the bull market run may be coming to an end, and why it may be time to buckle up for tougher days ahead. This is the first time for many of us when the possibility of World War III is even being discussed. While this would dwarf any market corrections underway, we’ve already experienced significant market volatility. While the Nasdaq has been down almost 20% this year, it has been worse for high-growth technology stocks.
Many quality names such as Meta, Netflix, PayPal, Shopify, and Zoom were down 40%+ in 2022. And while these declines look bad, the recent high-flying SPAC market has also been decimated, with many down 75%+ from their 52-week highs. The market was driven by high revenue multiples, massive capital raises and growth, growth, growth. Even before Russia’s invasion of Ukraine, there were many warning signs for the market, such as high inflation and rising interest rates.
Despite the market turmoil, it’s important to put things in perspective and it’s certainly not all doom and gloom. While the market is demonstrably worse for high technology growth stocks over the last year, such stocks have still had a tremendous run over the last several years.Â
There is still plenty of available capital and investor optimism to fund the digital transformation taking place across all sectors. However, you should never let a crisis go to waste and it’s important to consider the implications of the public markets on your business.
History shows that valuations in the private market tend to follow the comparable companies in the public market. As such, entrepreneurs may need to revise their business plan for a change in valuations and a higher cost of capital to finance growth. We are already seeing valuation expectations adjust downward and investors wanting to see a clearer path to profitability. Here are a few things management teams should keep in mind as they navigate through these unsettling times.
1. Be Cautious
When to raise capital, how to execute against a budget, what is the tradeoff between growth and margins – we talk about these matters all the time in board meetings. It is time for founders to at least consider the “rainy day” scenario and what levers they can pull to quickly adjust if needed. Even in good times, it’s prudent to prepare for moments when capital may not be as available or cheap as it has been.Â
While it may still be an attractive fundraising environment, just be cautious as investors may be less tolerant to fund significant burn rates or may do so but at lower valuations. Protect against this by being able to extend your cash runway and raising capital only when it makes sense for you. Now is the time to be vigilant, not panic. Vigilance means being aware of your situation and not getting too far ahead of yourself on capital burn such that it becomes too dilutive and costly for you to raise capital.
2. Focus on the Capital Efficiency of Your Business
It can be tempting as a founder to raise as much as you can, which then results in pressure to step on the gas and spend, spend, spend. While this often does not work even in good markets given poor execution, such a strategy can become very painful if capital sources become more demanding on terms. A winning strategy in any market is striking a balance between high growth and bottom-line results.Â
When there is as much uncertainty in the market as right now, it is even more important for companies to control their own destiny. This can be achieved with capital-efficient growth and with the plan in place to quickly dial up or down investments. This capital-efficient mindset will simultaneously put you in a position to not only execute against your vision, but also weather any storms ahead.Â
3. Build Your Situational Awareness
Entrepreneurs should always have their pulse on the ups and downs of the market and the implications it could have on your decisions. Understanding the Rule of 40 can help you assess the value of your business and the trade-offs made between growth and profitability.Â
With the Volition Rule of 40 Index, we built a method to compare the combination of your revenue growth rate and EBITDA margin percentage against comparable public companies. This is one quick way to see how your results stack up against the competition. There is clear correlation between a Rule of 40 score and stock performance.
4. Pursue Your Dreams
Do not let market conditions keep you from pursuing your dreams and changing the world. There is always room for innovation and opportunity for great companies to be born and succeed. Operating with paranoia can be helpful to your business, and now is not the time to let up on that. Stay alert, maintain balance and control your outcome.
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