Sach Chitnis is co-founder of Jump Capital, a thesis-led, sector-focused and operating-centric venture capital firm specializing in Seed and Series A investments.
With the collapse of Silicon Valley Bank, founders find themselves in a predicament when looking to raise either equity or debt. Most companies run their business on equity capital alone and have access to a venture debt facility. Access to venture debt is a “break glass in case of emergency” facility in that it enables companies not to be as hardened when they must raise rather than raising tied to business milestones. When a majority of the venture debt market is slowing or pausing new loan originations, one thing’s for sure, this loss of runway capacity will inevitably drive behavior change on all sides.
And a behavior change, or a reset, is sorely needed. Prior to this added chaos, the startup funding environment was already challenged. The reality is that most founders and venture funds don’t know what the market price is on startup valuations at the moment — and now an opportunity for a reset of sorts presents itself, not on valuations, but what we as an ecosystem do with its precious cash.
We know that if a founder raised their 2021 round of capital at today’s multiples, the effect would be meaningfully more dilutive, which is why embracing a cash-efficient approach is important. Combine a slower equity market and less debt capacity/flexibility, you enter a time where founders need to raise more equity at higher dilution or be more efficient with less.
One retro-cool phrase experiencing a resurgence in our industry is efficient growth. Even typing it feels like watching paint dry because when this phrase is uttered, people can’t help but jump to metrics like CAC/LTV, burn efficiency, OpEx ratios, and of course, the good old rule of 40. Efficient growth is a mainstay topic of conversation among investors, and I’m a longtime proponent, but that mindset hasn’t exactly been top of mind in the industry these last few years.
With a lens on early-stage investing (Seed to Series B), here are a few things I think resonate with VCs right now and the factors founders should consider when planning and operating:
Efficient unit economics are driving growth
Multi-year customer acquisition cost (CAC) payback is very 2021. Understanding how to do more of the same profitably is essential to efficient growth and to finding a VC to fund that growth.Change the mindset of growing the company to that of an inchworm. Grow the OpEx ahead of results to support and enable growth, but tollgate it to prove you can catch up. As you see the growth, expand. In the past couple years, companies assumed funding rounds would come to fill voids if there was a timing miss — that doesn’t exist anymore. Grow into the OpEx and expand sequentially. Move from a serial mindset to a parallel one on product and growth initiatives.