What founders should do in a down market
If you’ve read literally any finance news this year, you probably know the markets are down.
What does this mean? Well for starters: investors are being more cautious.
A lot of investors – esp. at the pre-A stage – have stopped investing while they wait for the market to go back up. So companies that didn’t make drastic cuts six months ago are now scrambling to stay afloat.
At Hustle Fund, we spent the latter part of November helping some of our portfolio companies find funding from literally any available source.
In the spirit of transparency, we want to share openly what we’ve seen in the startup ecosystem and provide practical advice for founders on how to weather the storm.
If you are strapped for cash, struggling to fundraise, or simply curious to know what the heck is happening, we’re here to break it all down.
Note: This article is inspired by a tweet thread from Hustle Fund co-founder Elizabeth Yin. You can see the original post here.
Why investors are tightening up
Elizabeth believes Q1 of 2023 will be even worse than today.
We’re not trying to scare you. Our goal with this issue of The Founder Playbook is to help you think about your cash management and financial planning.
Let’s look at the facts.
- Inside investors only have so much cash to support their portcos.
- External investors are more likely to invest in companies that have runway.
- Generating revenue is harder with everyone tightening their budgets.
Startups aren’t the only ones who feel pain. VCs have to deal with a year-end audit… but because of market conditions, those audits are much more intensive and time consuming.
Because audits are so painful, many back-office providers can’t manage the influx of work.
So VC funds might also have to find a new back-office provider in the middle of all this chaos. Candidly, this is something Hustle Fund dealt with recently, and it was awful. So time consuming.
Why am I telling you all this?
Because it’s important for founders to understand how investors think.
And right now, fund managers have less time to do new deals because their main priorities are
- figuring out their own business providers
- keeping their existing portfolio afloat
Plus, a lot of fund managers are fundraising, too. And it’s taking them a lot longer to raise money for their funds than in previous years.
Now that you’ve seen how the market affects everyone in the capital stack, here’s what we recommend founders should do, like, yesterday.
Three pieces of advice for founders
Recommendation #1– Make drastic cuts
This market favors frugality and people who are good with cash management.
If you think your business will run out of cash in Q1, make cuts now. Do this even if it means pausing growth and just staying afloat for a few months.
Recommendation #2 – Have a financial plan
If you’re not good at thinking through your cash management, find someone who can help you with your financial plan.
This doesn’t necessarily mean hiring a CFO. Even a few hours of help from a trusted expert will get you closer to the right track.
Recommendation #3 – Overcommunicate
This is a biggie.
If you’re raising capital right now – whether as a fund manager or as a startup – strong communication skills are more important than ever.
CEOs need to convey literally every step that is happening to all stakeholders.
Because when your stakeholders are left in the dark, they get more nervous. Open and honest communication creates trust.
In a dire situation, this may look like sending a daily email just to keep everyone updated. In a tight situation, it may look like weekly updates.
The key difference between getting funding and not getting funding is trust. And trust is reinforced by overcommunicating.
While this piece may sound bleak, this is the moment for wartime CEOs and wartime investors to shine. Good luck.
