Dear friends, 

In JC’s Newsletter, I share the articles, documentaries, and books that I enjoyed the most in the last week, with some comments on how we relate to them at Alan. I do not endorse all the articles I share, they are up for debate. 

I’m doing it because a) I love reading, it is the way that I get most of my ideas, b) I’m already sharing those ideas with my team, and c) I would love to get your perspective on those. 

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💡Must-read

👉 A Framework for Navigating Down Markets and Adapting to endure (Future) (Sequoia)

➡️ I’m sharing both the memo from Sequoia about the current economic context and what they suggest to do and other tips from another great article. On Alan’s side I think we have managed to act before the market realised it was too late. The advices on profitability are really important. 

The context:

• With the macro uncertainty around inflation, interest rates, and war, investors are looking for companies that can produce near-term certainty.

• The focus on near-term momentum is often shifting toward companies who can demonstrate current profitability.

• What works in any market, is consistent growth and disciplined financial management that translates into improving margins.

• ServiceNow, like the example Roelof shared on PayPal, has continued to compound revenue at 30%+ over the last decade and each year consistently improved free cash flow margins.

• It might not translate into your valuation overnight, but over the medium and long-term, disciplined, durable growth is always rewarded and translates into meaningful value appreciation

Survival of the Quickest: 

• Companies who move the quickest have the most runway and are most likely to avoid the death spiral. 

• Do the cut exercise (projects, R&D, marketing, other expenses). It doesn’t mean you have to pull the trigger, but that you are ready to do it in the next 30 days if needed.

• In 2008 all companies that cut were efficient and better. Don’t view cut as a negative, but as a way to conserve cash and run faster.

➡️ Instead of only “cutting” in our case, is really reviewing our plan, thinking about talent density.

• Recruiting is about to get easier. All the FANG have hiring freezes. 

Reaffirm your Mission/Values:

• This is really important to the missionaries you’ve hired. The mercenaries are the first to decamp. When we couldn’t go public at LinkExchange, the mercenaries were the first to leave and that happened at Airbnb and DoorDash.

• After 9/11, when sales went to zero at Zappos, the mercenaries fled to larger companies such as Nordstroms or Amazon.

• This happens again and again. Make sure you keep the missionaries.

• Ask for Commitment: Time to get your team’s commitment for the path forward or…politely ask them to lighten the lifeboat

➡️ Links to talent density, and making sure that people are at Alan for the right reasons (which I think is the case in the vast majority of Alaners!). 

Control Your Burn [Multiples]: 

• We shift our focus to burn multiples, which we define as cash burned divided by net ARR added.

• We like burn multiples more than other efficiency metrics for recalibrating when market conditions change because they are all-encompassing of your business activities.

Types of cuts and investments:

• All of them found they were more efficient the day after making the changes.

• You still have to focus on your future.

• Focus on the most important and leveraged investments:

  • Move back from the undisciplined pursuit of more.

  • Airbnb cut everything and most of the product, but invested more in core hosting and longer-term stays.

  • Zappos cut marketing but invested in customer service, selection, and engineering.

• Simplicity scales, complexity doesn’t.

• Double down on your top talent.

• Tighten up value proposition to drive sales.

• If it’s not one of these, it’s fluff:

  • Drives revenue growth 

  • Saves money (strong ROI) 

  • Reduce risk

➡️ When I read this, it asks the question: what should we kill?

• Winning in the years ahead is going to depend on making hard, decisive choices - confronting uncomfortable challenges that may have been masked during the exuberance and distortions of free capital over the past two years. 

Reevaluating Your Valuation: 

• Median public company software valuations have dropped from 12x forward revenue to 5x or less since highs in October 2021, representing an almost 60% decline. The same goes for fintech and consumer internet companies, which are also down over 70-80%.

• For instance, a year ago, it was common to see funding valuations for late stage private companies that were 100x of ARR (equivalent to run rate revenue). If you did your last round at $20M ARR, growing 3x, you may have raised at a $2B valuation.

• A helpful exercise is to figure out what ARR you need to reach to get back to your last round’s valuation and plan accordingly. To do this, use the estimated change in valuation multiples from leading public companies in your space and add a growth- and efficiency-adjusted premium for your faster growth. Then use this number to calculate the ARR you need to get to. Your goal should be to hit this revenue target with at least 12 months of runway. If you can do this, you’ll be in a strong position to raise your next round of funding.

• Continuing our example, a $20M ARR business which last raised at $2B might observe the leading public companies in its space trading at 10x revenue, rather than 100x. Adjusting for the startup’s faster pace of growth, relative to public comps, let’s say that 15x ARR is a reasonable valuation for its next round of funding. (Note: 15x ARR represents a 50% premium to the leading companies in their sector and a 200% premium to the software average of 5x, but the appropriate multiple will vary across companies.) This means their goal should be to reach $133M of ARR, or $2 billion divided by 15x, with 12 months of runway.

🏯 Building a company

👉 Thread by Brian Chesky on adapting to covid (PingThread)

• First, we simplified our business. We got back to our roots, prioritising the everyday people who host their homes and offer experiences

• We cut the vast majority of our projects, shuttered our business units, and made the painful decision to do a layoff

• Next, we changed our approach to marketing. When travel stopped, we paused all performance marketing and shifted our focus to PR (there have been 1M+ stories written about Airbnb since then)

🗞 In the news

📱Technology

👉 Google I/O; “Near Me”, Competition, and Innovation; Pixel and Fitbit (Stratechery)

• One of our most significant updates to search. In the Google app, you can now search by taking a photo and asking a question at the same time.

👉 The Next Google (DKB)

• Kagi – The Customization Engine

• Neeva – The Everything Engine

  • Right now you can connect Google Apps, Dropbox, Notion and more.

  • Searching your personal documents is as simple as adding “@me” to the query.

🏥 Healthcare

👉 A Conversation with Cerebral’s CMO, Dr. David Mou (Health Tech Nerds)

• Cerebral: A Conversation on Mental Health

• They’re now up to ~4,500 clinicians

• Cerebral’s typical clinician spends 20 hours/wk with Cerebral.

• 3% of patients who indicate anxiety as their primary complaint receive a controlled medication like Ativan or Xanax.

• David mentioned their work with payors to move toward value-based contracts. He also shared Cerebral is moving forward partnering with value-based primary care orgs.

➡️ Everyone ends up trying to work with payors.

👉 Weekly Health Tech Reads 5/29 (Health Tech Nerds)

• Friday Health Plans, an ACA insurance startup, announced it raised $70 million in equity and another $50 million in debt. Per Ari Gottlieb's post, Friday apparently is seeing quite strong member growth, from 75k members in 2021 to 300k members currently, although it lost $100 million in 2021 and appears on track to lose more in 2022. It's going to be interesting to watch how Friday continues to finance those losses moving forward, and at what valuation. Link

• nilo.health, a German-based startup building a mental health platform for employees, raised €7.49 million. Link

👉 HTN Weekly Health Tech Reads 1/2 (Health Tech Nerds)

• Everyone is going to eventually realize they need to provide both virtual and in-person care, and their specific care models and patient segments will dictate how much they do of each.

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