- In a new presentation, VC firm IVP is telling startup leaders to slam the shutters.
- The bottom of the market is still months away and access to venture capital will remain under pressure.
- Insider has exclusive access to the company’s deck titled “Thriving in a Bear Market: A CFO’s Guide.”
One of the technology industry’s oldest and most prosperous venture capital firms has issued a gloomy forecast: markets are far from bottoming out and portfolio companies must “surgically cut spending” while still investing in growth in order to thrive.
In a 10-page deck shared with Insider, the company IVP warns that a public-market downturn that has decimated technology stocks over the past nine months is likely to last another nine months. That has ripple effects for venture-backed, private companies that rely on outside investment to operate and grow. Founders should expect lower valuations and closer scrutiny from investors as the downturn continues.
“What the private markets said you were worth a year ago may no longer be relevant in the future,” the presentation reads.
General partner Ajay Vashee and partner Michael Miao presented the deck last week to fund executives from the firm’s portfolio companies at a private dinner in the San Francisco Bay Area. Insider shares a shortened version of the deck with permission from IVP.
The company’s new edict follows a series of similar memos from investors such as Andreessen Horowitz and Y Combinator. After years of telling founders to grow at all costs, investors are now urging founders to cut back and lengthen their runways to “prevent a death spiral.” warned Sequoia Capital in a presentation to the founders.
Founders need to be more careful with their spending as the frenetic pace of venture deal closing slows, according to Vashee and Miao. In the first half of 2022, venture capital funds picked up $83 billion in new funds — the highest amount over a six-month period for the industry, according to a recent report from Silicon Valley Bank. But the partners say founders will have unequal access to those funds, with money flowing more easily to early stage startups and existing portfolio companies.
“Looking at this dry powder, you can be lulled into thinking there’s a lot of capital out there,” Miao said.
“It is very good news that so much capital is on the sidelines,” he added, “but it will become much more difficult to access.”
‘Back to the status quo’
Investors will also push for more rational valuations for high-flying startups. According to the deck, the last time public software companies traded at current levels, in 2017, venture investors priced private software startups at about 15 times their current annual recurring revenue. That is less than a multiple of 114 times in 2021.
Deals will also take weeks to close, not days, as the market saw when cross-investing funds like Tiger Global Management and Coatue Management entered the scene. “Now we’re back to the status quo,” Miao said.
The presentation encouraged a balanced approach to cutting costs and extending runways. While they must remain conservative on spending, the deck said it was “ignoring the urge to radically cut costs.” They risk knocking out growth if they cut too deep, Vashee told Insider. And it’s important for companies to keep growing and investing in new products and initiatives to stay competitive.
“The market environment will certainly favor companies with real market differentiation,” Vashee said.
Now read IVP’s deck, shared with his permission.