SmartAB™ Wisdom #9: Apply The Sutton Rule To Survive The Venture Capital Crash…
According to Wikipedia: “The rule of threes involves the priorities in order to survive. Normally, the rule of threes contains the following:
· You can survive three minutes without breathable air (unconsciousness), or in icy water.
· You can survive three hours in a harsh environment (extreme heat or cold).
· You can survive three days without drinkable water.
· You can survive three weeks without food.
The rule may be useful in determining the order of priority when in a life-threatening situation and is a generalization (or rule of thumb) rather than scientifically accurate”.
Unfortunately, no rules can predict how long the startups can survive - after the VC bubble bursts. For some, it will be just 3 months. For others, it may take much longer. So, here is what to do, to improve your odds…
Once Upon A Time… Past Market Crashes & All That Jazz
Wealthify says: “Dips, drops, bumps and crashes. They happen all the time and one thing market downturns have in common is that they’ve almost always been followed by recoveries”. And concerning the dotcom crash, specifically, Wealthify says the following:
“The Dotcom Bubble Burst (early 2000s) - What happened?
Remember the 1990s? The Internet got commercialised and we were all super excited about it – well, we still are! Suddenly, the sky really was the limit and many new Internet-based companies (‘dotcoms’) were launched. Needless to say, investors were loving it and most of them thought that all businesses operating online would become very profitable in the future.
Yes, they were wrong! This overconfidence created a speculative bubble – when some investments are overvalued. And in March 2000, the bubble started bursting. The Nasdaq, US market that lists tech companies, fell more than 20% in April, after reaching what, at that time, was its all time high. And by October 2002, the market hit its lowest point – 80% down from its peak in March 2000.
How did the markets recover?
Just like the Tulip Craze, the Dotcom Bubble Burst didn’t last forever, and the Nasdaq eventually recovered after some years. And although the Nasdaq was seriously hit by the Dotcom bubble burst, it bounced back by the end of 2002, and in 2015, the market recouped its losses”.
Let The Good Times Roll…
To all the fortune tellers, I would like to remind Yogi Berra’s quote: “It's tough to make predictions, especially about the future"…
But in May 2022, various VC firms sounded the alarms… And Business Today reported: “A growing number of global and domestic venture capital houses alike are warning their portfolios that the era of easy money has come to an end, the pandemic-induced digital boom is over, and that it is time to go back to business basics to survive. The message is to conserve cash, hire diligently, optimise cost, control cash burn, and extend runway as far as possible”.
According to TechCrunch: “Y Combinator, a Silicon Valley kingmaker, is advising its portfolio founders to “plan for the worst” as startups across the globe scramble to navigate a sharp reversal after a 13-year bull run.
The investment firm — whose early backings include investments in Dropbox, Coinbase, Airbnb and Reddit — this week suggested startups cut their expenses and focus on extending their runways within the next 30 days. For those who don’t have the runway to “reach default alive,” YC is strongly suggesting that they consider raising money.
“If your plan is to raise money in the next 6-12 months, you might be raising at the peak of the downturn. Remember that your chances of success are extremely low even if your company is doing well. We recommend you change your plan,” the firm said in the letter, titled “Economic Downturn.”
The note from YC, which backs hundreds of young startups a year, is a signal that the market teardown that has significantly slashed the value of a large number of tech companies, including giants such as Shopify and Netflix, in recent weeks is trickling down to the early-stage startups universe”.
Similarly, Crunchbase reported the following about Sequoia Capital: “The venture giant—known for investments in tech titans such as Apple, Uber and Google—shared a 52-slide presentation with 250 founders on May 16 over Zoom that warned of a “crucible moment” of uncertainty for the venture market due to inflation, the markets, and geopolitical issues.
Sequoia told founders not to expect a “swift V-shaped recovery like we saw at the outset of the pandemic,” and suggested extending runway and examining their businesses for excess costs…
VC By The Numbers, Today…
Not surprisingly, Crunchbase reported in June 2022 that: “Global venture funding in May 2022 reached $39 billion, Crunchbase data shows, marking the first month in more than a year when it dropped below $40billion. The May figure is also well below the $70 billion peak VC funding reached in November 2021.
Late-stage and technology growth investing has been the most impacted by this year’s venture pullback. Last month, venture investors globally spent $22.3 billion in the late- and growth-stage sectors—down 38% from the 2021 monthly average of $36.2 billion”
“Last year at this time, venture dollars flowed freely and founders could name their own terms and prices on deals. There were stories of investors putting up money without meeting the founding team, not doing full due diligence, and agreeing to valuations far from the scope of any reality—all to not miss out on the “next big thing.
Funding continues to trend downward, and private valuations continue to take a beating as inflation, interest rates, geopolitical issues, and public market woes have caused a pullback in the market”.
The 80/20 Rule To Leveraging Your Marketing Dollars
The Pareto Principle, or “80/20 Rule” is often used to analyze the existing customer base. In many businesses, 20% of customers represent 80% of revenues. So, it makes a lot of sense to identify the characteristics of the top 20% of your best customers and allocate more efforts to marketing and selling to similar customers, in the future.
But what if you could predict who the best customers are - without spending a great deal of money, to begin with? After all, I am talking about the money that is now harder to get…
Well, to answer this question, I will remind you of the following: whether you call it “The Occam’s Razor”, or the “KISS Principle” (Keep It Simple Stupid) – this principle is also well known as the Willie Sutton Rule…
According to Investopedia: “The Willie Sutton Rule is based on a statement by notorious American bank robber Willie Sutton, who, when asked by a reporter about why he stole from banks, answered: “Because that's where the money is.”
In other words, his end goal was money so why waste time looking for it in obscure or questionable places instead of taking the path of least resistance and most success and going straight to the source? The rule can be applied across many different disciplines, from investing to medicine, science, business and accounting”. So, let’s look at my Cleantech Sutton Rule:
The best customers are the ones who have the most money to spend
And when there is a great deal of money involved, the best customers are the ones that you can help boost their IRRs the most…
Let’s face it, pension funds, insurance companies, and other financiers specializing in project financing - are often offering both: equity and debt. They are looking for bankable projects to invest in. And in many cases, they are issuing green bonds - to raise the funds. Guess what, all the funds must be invested without delay as the clock is ticking and the coupon holders of the green bonds - must be paid…
In my post: The Curse Of Doing Nothing, I emphasized how hard it was to close the deal with some customers. At the first glance, they all could have immediately benefited from the proposed solution. And I said:
“Even the best technologies and the best solutions – still do not guarantee to close the deal. Offering lower costs at a higher value is necessary but often not sufficient. I learned it while selling to corporate clients - such as Verizon…
Obsessive COST reduction doesn’t bring radical PROFITABILITY. Turning COST into PROFIT center (TCIP) – does. The real MAGIC occurs when you can clearly articulate such a TCIP strategy – no ifs, or buts… Communicate it wisely, and you will pull the rabbit out of a hat, too…"
Don’t get me wrong. The TCIP strategy still works. However, instead of spending so much time and effort on selling individual solutions - aggregating and packaging the projects into a sizable portfolio makes more sense.
Investment-grade projects (with BBB- credit rating) are extremely attractive to pension funds. So, follow the money, the same way Willie Sutton did. For example:
· Energy Efficiency Projects - focus not on clients belonging to BOMA (Building Office and Managers Association) - but rather on the pension funds interested in energy efficiency returns
· SolarPV Projects - focus not on rooftop owners - but rather on the pension funds interested in bankable SolarPV portfolios
· Government Contracts – focus not on selling to individual departments, but rather on the pension funds interested in projects developed for the governments. And even if any given project fails, chances are that the pension fund can sell it to other clients.
For More Information
Please see my additional posts on Linkedin, Twitter, Medium, and CGE’s website.
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… Thank you.
I’m In The Business Of Joining Advisory Boards
IMHO, the current economic downturn caught many CEOs by surprise. They never experienced the dotcom bubble and could benefit from the KEE (Knowledge, Experience, and Expertise) - offered by experienced CEOs who did…
However, until now, tapping experienced advisors wasn’t easy. It was too costly for many companies that are low on cash. And equity-only compensations were often not attractive enough to draw in the rainmakers
Welcome to SmartAB™ – a radically innovative Advisory Board service offered as a low-cost monthly subscription. And for the first time, many VCs, CVCs, and PEs can now recommend SmartAB™ to the investees - without seeing their equity stake diluted by stock options offered to advisors
I’ve been saying it for years: imitation works best in karaoke bars, not in business. To escape the competition, businesses need to constantly reinvent. So, enroll in a SmartAB™ subscription at Substack and turn Business Development COST into… PROFIT centers
When the going gets tough and the companies don’t know how SmartAB™ can help – is REGRETTABLE. Knowing yet not utilizing good advice - is UNFORGIVABLE…
An Innovative Advisory Board Service Offered As A Low-Cost Monthly Subscription
“Data gives us the facts; Facts give us information; Information gives us Knowledge; Knowledge turns into Wisdom, and Wisdom offers an ultimate Advice leading to a better decision” – Oleg Feldgajer
Disclaimer: The opinions are my own. If you require professional guidance about taxation, accounting, or legal issues – please contact qualified lawyers and certified accountants. Thank you.