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Craft Ventures: Operating during a downturn

What’s happening in public markets

Starting in the summer of 2021, inflation spiked and has continued into 2022. In order to counter a rising inflation rate, the Fed has communicated that they will raise interest rates, even though this will cause pain.

Interest rates have been at historic lows after the Great Recession and  were cut again due to COVID. The market has been running hot and needs to cool.

The rising interest rates hit growth stocks the hardest because their earnings are further into the future and are discounted back at a higher interest rate. The start of 2022 has been a fundamental value reset. Companies have posted strong earnings so far, but the market is forward looking and is expecting growth to slow. 

What’s happening in private markets

Venture capital firms take their cues from the public comps. Public multiples are their exit prices, so as valuation drops in the public markets, the private markets follow. 

Liquidity has left the ecosystem. The market was flooded with cheap dollars from low interest rates in 2020 and 2021 which VC funds deployed. Due to the hotness of the market, funds would raise their capital and deploy it all in the same calendar year. The demand for deals was greater than the supply, bidding up the valuations.

Firms are now frozen while awaiting the uncertainty. The deployment of funds are slowing down to a more normal pace of being deployed over a 2-3 year period rather than 6 months. Investors are now focused on keeping their portfolio afloat rather than adding to it.

We’ve been here before

Since 2000, we’ve gone through 3 major market correction periods:

• Dot com bubble of 2000 - 2002

• Great recession of 2008-2009

• Post-Covid of 2022-202?

This time is more similar to the Dot com bubble rather than the Great Recession, as it stands right now. There are similarities between the involvement in tech companies between the two periods. The Dot com bubble was hyper focused on eyeballs on a web page and Post-Covid was all about revenue growth. Both are important to businesses, but there needs to be cash produced to create a sustainable long term business.

What you can do about it 

Funding is still possible now, but harder. The bar has been raised for what companies will be funded. They put together a great chart of some key metrics indicating the quality of a company.

It would be ideal to be in the “Great” column to get capital. Just because your company might not meet all of the “Great” criteria doesn’t mean you won’t be able to raise, it will just be more difficult. 

Their main message David Sacks and Jeff Fluhr communicated was everyone should try to lower their burn rate and extend your runway. It’s a difficult choice, but it is probably worth sacrificing potential growth for adding more months to your run rate. 

The ideal state for startups would be to have a 30 month runway because it typically takes 6-9 months to raise capital. If a company has a year or a year and a half long runway, before leadership knows it, they need to raise money again. They wouldn’t have real time to fix and stabilize their company.

Some things might actually get easier during this time. There should be less competition for hiring top talent. Spend could decrease on customer acquisition costs due to less competition.

Link to the full video by David Sacks and Jeff Fluhr.

End Note

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Have a great day,

Nick