Craft Ventures: Operating During a Downturn Part II

0:00 um jeff and i are gonna say a few words and then we'll we'll take questions um we're gonna cover you know what's been happening in the public markets over the last few weeks and really the last six months uh how that's translating to what's happening in venture markets um i'm going to take those first two second sections and then jeff's going to talk about uh you know we've seen this movie before what it what it looks like and

0:24 and what you guys can do about it in terms of what's happening in the public markets um in terms of underlying causes um i just don't want to spend too much time on macroeconomics but just so everyone understands like why you've seen this huge downturn in the stock market that really began all the way in november of last year um basically starting last summer we started getting inflation prints as measured by cpi that were really high

0:55 so if you go back to last summer there's this huge shock inflation report that inflation was over five percent suddenly you know it's been two two and a half percent for many many years and so all of a sudden inflation reared its head after seem to be a non-factor for a long time by the end of the year it was about eight percent you saw just um a few days ago there was another report uh that inflation was at 8.3 percent and

1:19 so it keeps hitting new highs and you can see that uh in the red line on this chart that you know this chart goes all the way back to 1954 but if you look since 2020 at the far right edge of the chart you can see that inflation is spiked all the way up to 8 the purple line represents the fed funds rate which is the basically the interest rate that the fed sets and you can see that

1:46 the fed funds rate tracks inflation very closely because the fed's mission is to combat inflation and so what it does it raises the fed funds rate to reduce inflation and that historically has work but it does require the fed to raise interest rates you can see here that cpi and the fed funds rate have gotten wildly out of sync with each other the fed waited way too long to react to inflation and as a result the expectation now is that the fed fund

2:16 rate may have to move up substantially they've already moved it up to about one percent it was at zero after the great financial crisis of 2008 but uh recently it's up to about one percent uh but with an expectation that there may have to be a lot more and you can see just uh the other day powell who's the fed chair finally came out and admitted that they were slow in reacting to inflation he basically said

2:42 that he's willing to do whatever it takes to uh to stop inflation even if it hurts the economy basically even if he mean even if it means there's no soft landing meaning that even if it means there's a recession he's committed to stopping inflation so you know you're going to see more pain ahead in terms of interest rates uh increasing and you can see this already in the 10-year treasury which is traded on the open market the fed doesn't

3:11 set this interest rate it's really set by markets and you can see that the 10-year t-bill the interest rate has basically gone from uh half a percent during covet uh to over three percent today so the markets are already adjusting very rapidly now i think one thing to understand about this is that the anomalous period is not now in terms of interest rates the anomalous period was after uh was basically after covet hit so in the early months of 2020

3:43 in response to covid the fed basically slashed interest rates to zero and so rates went down for a period of a couple of years they were you know the fed had this zero interest rate policy or zerp and um and as a result of that um people start to believe that interest rates would be extremely low forever um but but the anomalous period was was sort of this 2020 and a 2022 period where rates were extremely low what's

4:14 really happened is rates have gone back to something more normal and they could still increase quite a bit more the the bad news for stocks is that they generally move in the opposite direction as as interest rates and you can see it here there's a very obvious inverse correlation here between say the s p 500 and the 10-year treasury yield this would also be true for the nasdaq even more extreme basically this the um

4:46 the stocks that all stocks get hurt by rising interest rates but uh the long-dated stocks the stocks that have their earnings and revenue in the distant future get hurt the most because the higher interest rate means that those future earnings of revenue get discounted down to a lower number today so even companies that are hitting all their revenue earnings targets if they're growth companies they go down relatively more than value companies and so that's basically what what's been

5:17 happening in the markets is that growth stocks have been getting the hardest the um the dow jones the nasdaq and the s p are all down but it's the nasdaq that's down by far the most and then within the nasdaq uh it's been all the growth stocks especially the recent ipos the newer listings the specs the more growth oriented they are the more they've gone down over the last six months and a lot of the carnage has

5:46 been hidden by the fact that if you just look at the indices um you you you know the indices are so weighted to the large caps like the nasdaq this is weighted to you know the the googles and microsoft's amazon and so forth and they're down but they're not nearly down as much as growth stocks so just to give you some examples this was done as of last night a firm is down 89 percent off its

6:15 52 week high asada and i'd say many many software sas companies down 86 shopify and zoom are down 79 zoom is lower today than it was before the pandemic which is pretty stunning you think about how much zoom grew during the pandemic it's now valued lower than it was uh in early 2020. uh monday lycasana down 78 toast docusign twilio

6:45 and then even the very best sas companies companies like octa and snowflake which are growing very fast do billions of revenue very strong franchises down 68 65 so all of this is due to the fact that um that again that valuation multiples are compressing because interest rates have gone up significantly um today there was a bounce in the stock market and you know so for example a firm was up 30 that's good to see

7:16 hopefully that's a bottom but it doesn't change this analysis and the reason why is i mean if your stock is off 90 and then you get a 30 bounce all that means is that instead of losing 90 you've now lost 87 so it takes a much bigger increase after a loss to get back to where you were and i should just note that generally speaking all these companies are doing quite well they are reporting significant revenue growth

7:46 uh you know there have not been giant misses uh most of them are growing very strongly they're doing well it's just that the company sorry the market is now choosing to value growth stocks in a fundamentally different way and you can see that here so this is just for the sas index and the chart goes back five years you can see um let's see how do we get the uh well i'm gonna i'm gonna tell you what

8:15 some of these numbers are um yeah okay so you can see here this is the um the multiples the valuation multiples that the public markets have put on sas companies and it's broken the companies out by uh by basically whether they're high medium or low growth and then the blue line is sort of the average of the whole category and you can see that

8:45 uh if you go back uh five years these uh averages were these companies were trading at you know roughly five to seven times arr you know this is enterprise value divided by next 12 months revenue which is sort of close to arr but but during the pandemic because of the zero interest rate policy uh and the belief that interest rates would stay low forever these companies went

9:16 you know the ar multiples went through the roof and you can see that especially for the high growth companies you know they went from you know roughly five times all the way up to as high as 35 times during the pandemic they have come all the way down back to the high growth now is about eight times and then the average is about 5.6 so the average during the pandemic was about 15 times so it's gone

9:39 from 15 to 5.6 so you're talking about roughly a two-thirds correction in the valuation multiple that's applied to these public companies let me just see if i can okay for some reason we can get you those exact numbers um so just i thought this is a good tweet by matt turk so just to put the depth of the reset in context to justify a one billion dollar valuation a cloud unicorn

10:11 would need to plan on doing 178 million in revenues in the next 12 months if you were to apply the current median cloud software multiple so again the current multiple that the public markets are putting on sas companies is a 5.6 times forward revenue so now that that's for the median sas company which is growing about 20 if you were growing 40 this number would be closer to eight times but it's still you know way down from

10:42 you know where it was before so again the average has gone from 15 to 5.6 the high growths have gone from 35 to 7 to 8 something in that range so you can see now just how incredibly hard it is to justify even like a single digit unicorn valuation if you were to use the public comps you'd have to do again if you're growing the at the average you would need to do 178 million in revenue um if you're

11:10 growing faster than that you can sort of discount it down but this is sort of the the new new reality you saw jason lemkin had a tweet that sort of um shows the implications of this he said if nothing else expect a fraction of the new sas unicorns we saw in 2021 with so many amazing public sas companies now worth just 2 billion you really really got to be epic to be worth 1 billion so you know what he's saying

11:42 is there are public sas companies that are doing hundreds of millions of are that are only worth say two billion so you know how many startups actually get into the hundreds of millions of are you have to believe that to be the case and you're going to get a lot closer to delivering those actual numbers in order to be worth in order to have unicorn status in the coming years so that's what's been happening in uh

12:12 the public markets this has been a fundamental evaluation reset of all growth companies and then also sas companies in particular um how does this trickle down into venture markets well there's three ways so number one vcs take their cues from the public comps those are the exit prices for vcs right so vcs know that a company that used to have a 10 billion unicorn outcome or decacorn outcome is now only worth say 3 billion

12:43 then they can't pay the same prices they were paying before and that does trickle all the way down to the series a stage the second reason is that liquidity has left the venture ecosystem there's just a lot less capital available to invest i'm going to speak to that in a second and then third you're seeing many firms are frozen in the market while they're awaiting clarity um we're not but a lot of vc firms are basically just risk off

13:09 they're just not investing right now and the reason is there's just so much uncertainty you have the uncertainty in the economy there could be a very severe recession coming you've got the geopolitical uncertainty of this war and does it escalate and spin out of control and then of course you just have the the fact that the markets have adjusted so rapidly that a lot of vc firms are awaiting clarity on where the new valuation levels are going to

13:35 land so for all those reasons venture markets basically have followed the same trajectory as the public as the public markets and you can see this in terms of the liquidity effect that the crossover investors are basically out of market um they're either temporarily gone or gone forever if you think about like where the liquidity over the last couple of years in venture came from it's true that vc firms had bigger funds but also and they were

14:06 deploying them faster but also you had these huge crossover investors who are public market investors who had come into the venture space thinking there was an arbitrage they were looking at the public comps and seeing oh wait if we invest in the last couple of private rounds we could eventually uh you know there's a huge spread between public and private valuation since they bid up all the private evaluations based on the public comps unfortunately those public

14:30 comps were inflated so you would think okay well don't these guys have huge funds that were already raised recently that they can still deploy and there's a really stunning article in techcrunch just a few days ago saying that even tiger which just raised a massive new 12.7 billion dollar fund they didn't even announce this till march of this year i think it was largely raised in september of last year they even deployed that fund it's gone

14:55 already something like 65 deployed so even these huge funds that were raised and announced in the last year because the pace of deployment was so high a lot of that money is gone and um and then of course the vc funds who still have funds they're slowing their pace of deployment they're going from one year pace of deployment to more like two or three if even if the same amount of capital was available in the ecosystem

15:21 if people if vcs just slow their deployment from one year to three you're looking at a two-thirds annualized reduction in the amount of capital available you already started to see this in q1 in q1 venture funding dropped 20 percent and q1 really wasn't that bad i mean the market was in the process of going down but it had not hit the levels it sat today there was not sort of a panic uh and yet even because of what was happening in

15:50 the markets in q1 vc funding was down 20 i think in q2 it'll be it'll fall off a cliff and you'll see something similar in q3 and q4 again just showing that this doesn't just apply to growth funding it goes all the way down to the early stages obviously if you're the first thing to happen is the growth investors reduce their evaluations because they're looking at exits that are have much lower valuations but then the series a investors have to look at what

16:22 growth funds are paying to mark up their deals in a couple years and if those prices are way down then early stage vcs have to pay less as well and you've already seen just in q1 again uh series a deals were off um from 2669 to 23 64. and again you'll continue to see more of this so just like what i was saying q2 expect will be uh also the nuclear winter slide don't be overly dramatic but funding

16:52 uh patient deployment's gonna fall for cliff all right let me kick it to jeff to talk about the next steps here okay great uh thanks david so i'm gonna share my screen now um here we go all right uh whoops okay everybody can see that yep great okay um so the the you know we've been here before this is not unprecedented um go through a little bit of historical

17:23 context here so the last two um you know kind of major recessionary periods uh were the dot-com crash of 2000 2002 um this one lasted about two and a half to three years um you know it was really driven by this excessive speculation of internet companies um really fueled by the bull market of the late 90s there was an abundance of venture capital the uh at the time all these companies were being valued off of eyeballs how

17:52 many eyeballs did companies have was sort of the metric uh didn't matter how much revenue you had or profit but it just mattered how many eyeballs um when the market corrected in april of 2000 it was sort of the beginning of a like i said two to three year period of um sharp declines in the stock market and also mass layoffs and bankruptcies and companies that sort of um were going going out of business including companies that went public so you know

18:18 several public companies folded at that time period um it was pretty dramatic it was very tech and internet focused um we also then had the great recession of 2008 and nine um this this one lasted about a year and a half to two years this was really an asset bubble that was um concentrated in the real estate market in the housing market um you know driven by sort of overly aggressive lending and mortgages um it kind of

18:44 created the whole economy the interesting thing about this one is that it actually didn't affect the tech sector as much as some of the other sectors um so now we have you know this current crisis um which we believe is uh you know the beginning of a recession and the next kind of significant down period you know 2022 to you know or maybe we'll even say it started in 21 but um as we look back uh you know in retrospect but

19:13 when it ends we're not sure yet we think it'll be at least you know year and a half to two years um and this one's also like largely being driven by sort of tech and growth uh you know companies um you know we had sort of inflated valuations driven by like 10 years of very low interest rates and now this correction is being caused by this expectation as david described of of higher uh of higher of higher interest

19:37 rates um and inflation obviously being a big input there um the one that i would say about this this most recent um downturn is it feels a little bit more like the the 2000 to 2001 internet bubble bursting because again it's very tech centric um so kind of in the work that we all do and the in the in the types of companies that you're all building and in the venture capital space it feels a little bit more

20:01 similar um to the 2000 and 2002 uh downturn um this is just sort of these are the types of headlines that we saw back then you know um you can see here this chart of the sort of rise and fall of the market um you know dot com bubble bursting companies sort of you know um having you know struggling um the dot bomb was was one of the terms that people were using back at the time or the bubble bursting

20:27 um and uh we even had this this um this site called [ __ ] company back then um where every day you would sort of go to [ __ ] company and you would see different companies that were either doing big layoffs or um shutting down or um you know had other problems um you know i think the the the real silver lining of this time period is that there were some amazing companies built um either that were started right before

20:53 this time period or even started during this time period including companies like paypal amazon salesforce google those companies all started either right before the kind of 2000.com bubble bursts or even you know in some cases during um during during the downturn so okay what what can you know what can you guys all do about this um you know i think the good news is there's a lot you can do about it you can control your own destiny and you

21:17 really have um you know have the ability to you know we're early enough in this in this kind of period that um there are things you can do today to kind of um you know help position yourselves for success in the next couple years um you know the funding markets are definitely tighter but they're not gone completely so that the bar is higher but it's still possible you know these are some metrics that we've laid out growth metrics gross

21:45 margins net dollar retention you know pack payback burn multiple um you know that we think are sort of great good and danger zones so growth if you're growing you know 3x that's great if you're growing two and a half x that's good if you're under 2x that starts to be in the danger zone gross margins of 70 are great 50 is good under 20 the danger zone net dollar retention 140 is great 120 is good um under 100 you

22:13 know it's the danger zone your cac payback six to 12 months great 12 to 18 good over 24 months you know in the danger zone and then again burn multiple one or less is great one to one and a half is good the danger zone is over two if you haven't read david's blog post on the burn multiple i would encourage you to check it out this great blog post uh back to 2020 i believe um about

22:37 about this concept of burn multiple way before anybody was you know talking about being capital efficient and so that's that's definitely something to pay attention to um in the market we're in right now you really have to sort of be in this kind of great column um to uh to attract capital um and then the only other thing i would say is as it relates to growth and capital efficiency if if you have the option to

23:03 not raise capital by growing a little slower so if you can extend if you have the option of saying you know having a year of runway at a at a 3x growth rate versus having two years of runway um at a 2x growth rate i would say that extending your runway trumps growth rate right now and i would choose that second option because the best the best scenario here is to not have to raise capital at all and really this

23:26 slide is about um what you need to do if you do need to raise capital um all right next slide here so um so things to think about that are in your control um that you could be you know doing now um you know if you if you do um you know top up if possible if you do have that option to raise more capital be open to lower valuations if there were investors that were interested in

23:49 your last round that didn't get their full allocation or didn't you know didn't get an allocation at all um you know those might be folks who may be interested in putting some money in um there are adjustments now that you can make to have uh 30 plus months of runway you know we we thought about what um what the right amount of runway is and we were thinking 24 but you know the problem with 24 months of runway is that

24:12 if you you really need to raise capital about nine months before you run out of runway six months is pretty tight because it doesn't give you an opportunity to course correct if that fundraise doesn't go well so the advantage of 30 months of runway is that you know you can so so to finish the 24 months point if if you have to start at nine months before you run out of runway that means you have to start in 15 months and the

24:36 problem with raising in 15 months is that that's like just barely over a year from now and our view is that this market could still be pretty choppy you know 15 months from now so really you know looking at 30 months of runway is i think a better um you know a better goal for for folks to have and um you know and if you if you don't have that maybe maybe it's it's a good idea

24:58 to try to raise um or if you can make some minor modifications um whether that's you know modify your hiring plans consider a hiring freeze you can have a hiring freeze and still hire a few of the kind of key crucial roles but generally have a hiring freeze across the company um you know or and also think about trimming any sales and marketing spend that is not you know immediately measurable and uh and has a near-term roi um so

25:27 those are some of the things that we would recommend thinking about to try to extend your runway to 30 months or as close to it as possible um you know aim for a burn multiple of of two or lower um and i think you know acting faster the sooner people act especially in things like cutting cutting burn the more impact it has uh because the less the less cash you burned um waiting um and i think the good news just to you

25:49 know i think leave everybody on a positive note and then we'll open it up to q a is you know again as i touched on before some of the most iconic companies have been built in these in these times it's actually a great time to build a company in a lot of ways because if you the one thing that's harder is access to capital but actually a lot of other things get easier um you know you you have an easier time

26:10 hiring people that's been one of the most challenging things in the last five years as the market got really hot but in in these markets it actually tends to be much easier to hire people you start seeing companies doing layoffs you see fewer companies aggressively hiring so um hiring does get easier marketing customer acquisition sometimes gets easier because the competition in in marketing spend so things like you know google paid search or um facebook ads can sometimes be cheaper uh in these

26:39 times um so you know again some of these companies like google amazon salesforce airbnb stripe paypal were all built in these um sort of tougher times so um you know and i think you know we companies have an opportunity to course correct right you can focus on the fundamentals you can make some of these changes we talk about it's still pretty early to be able to make those changes um you know we are super excited about you know

27:02 being in business with all of you we think you can do it we're here to help um and uh you know the world the world will keep we'll keep going um the world is not going to end so um we want to leave you on that you know positive note i know there's been a lot of negative negativity in the markets and on twitter and in this presentation so i think there's also a lot of stuff to be excited about i think

27:23 that's sort of the end of our um prepared comments so we will open it up to q a and um and kind of go from there jeff i've been um i've been compiling a bunch of the questions so let me just hit hit a few first so one is and dave you can comment on this too um there may be a misconception that the tldr here is to get to break even asap um and maybe that's like a

27:51 misunderstanding of what a one burn multiple is so if you guys can comment on are you are we saying that they need to get to break even or what are what is the guns here well if you can that's amazing i wouldn't discourage anyone who could operate in a cashflow positive way i wouldn't discourage them from doing it but i that that's a super high bar that i don't think most startups could get to a burn

28:12 multiple of one means that the amount of money you're burning equals your net new arr so you know if in a given quarter you add a million dollars of net new arr ideally your burn is not more than a million dollars even that's pretty tough to do historically but definitely doable you know that that's what efficiency looks like i think the the way to think about um your spending is that the first thing you have to do

28:42 is honestly assess uh your eligibility to raise a new round in these conditions and jeff can we here we throw up that slide again on like what great looks like yeah if you have great um i think this slide's really important oh and i just i think that's fantastic there it is there it is so if you have great metrics i think you're gonna be able to

29:12 raise it may not be the valuation you want um you know i don't know what your valuation was last year and so forth but you'll probably be able to raise um but if you're merely in the good column you might have trouble i mean we're in kind of a nuclear winner now if you're like great on three or four variables and good on one or two probably you can raise but if but i would say just merely good numbers may

29:40 not may not be good enough so and if you've got danger zone numbers then i'd say that's a real problem you're probably not going to build a race so if you're in the danger zone you have to fix those variables like asap and the sooner you do it the better off you're going to be and the one that's probably most often for a lot of companies can be the burn rate the burn multiple the amount of

30:04 money you're burning um so so again you got to be realistic about where you stand in relation to your ability to raise capital in this environment and if you have a danger zone variable that's basically disqualifying your future funding you need to give yourself adequate time to fix that and like jeff said adequate time really is more like two and a half years not even just two years because again you got to go out and raise before you run out of money so

30:34 even if you had two years a runway that doesn't give you two years to fix your company it gives you maybe maybe a year and a half so giving yourself the time to address all the issues in your business is the most important thing you can do right now to make sure you survive don't wait to take the hard steps because the sooner you rationalize your burn the more money you have in the bank on the other side of that decision

31:04 sometimes people will leave it way too late i mean they'll say okay if we don't hit this or that number we'll make changes in six months or a year the problem is you know a year later now you're down to 12 months of runway and then you make the decision and you buy yourself a little bit more time but if you had made that decision a year before you could have had three years of runway now you only get you know a year

31:26 and a half or whatever it is so um just the luxury of time it's the it's the greatest luxury you can have as a startup is the time to um to to make all the changes in your business that you need there's a bunch of questions about how this applies to marketplace businesses that jeff you should touch on but before we do that um there's a few other follow-up questions to this point um one is if everyone takes this advice does that

31:55 imply that getting new and more budget so selling is going to get harder i think it's a i think it's a great point and and so i would say yeah that's definitely a possibility and it kind of depends on your exposure so so here's what's in the process of happening is that until now for like the first four months of the year the stock market correction was mainly driven by value evaluation multiples resetting and resetting back to their

32:26 historical means as opposed to this sort of anomalous covet period so it was driven by multiple compression most of the stocks were actually doing well in terms of revenue and earnings except for a handful of coveted stocks so this is not being driven by bad results now what's we're in the process now of happening is going into recession i think and in the startup world there's definitely a recession because everyone's getting hearing these these signals and they're basically going to

32:53 reduce their burn so we don't know what the impact yet is going to be of the recession the impacted date's just been again in multiples not revenue but but yes it could get harder to perform during the downturn i don't think that's a great excuse for startups by the way because the market for your product the addressable market for your product is so large that there should always be somebody to sell to but there could be yes it could

33:18 get a little bit harder um yeah let me take that one about the marketplaces um yeah so good question i would say that the framework on this slide is sort of generally applicable to marketplaces with a couple of tweaks and i'll kind of go through each one of these so on the growth concept you know i think it's pretty much applicable as the numbers are shown here um but as i said earlier and i think this

33:43 again this to me is both true with marketplaces and sas i would the one thing i would say about growth in general is if you again this slide is about what you need to raise capital it's even better to not have to raise capital so if you can grow only 2x by extending runway to say 24 or 30 months versus growing 3x and need to raise in a year i would say it's even better to just extend your runway to 24 or 30

34:08 months even if you're only growing 2x because that will allow you to not have to raise at all um so with that one caveat i think this um this growth row applies to marketplaces as well gross margins same thing um the only thing i would say on gross margins with which is important to think about in the context of marketplaces is this is you know the denominator here should be net revenue not gmv or gtv so some some

34:33 marketplaces you know present their p l um where they've got sort of you know a gross merchandise value gross transaction value then they've got a net revenue which is the take rate times that so this would be the gross margins that are below net revenue um that that um you know net revenue minus those variable costs that get you to gross margins so this would be the gross profit divided by the net revenue not divided by gmv so i know that i know of

35:00 a couple marketplaces in our portfolio that have presentations slightly different different from that so that with that one caveat i think these are generally these percentages are generally uh also true for marketplaces um the net dollar retention i would say is the one thing on here that's probably not relevant for marketplaces um you know we don't net dollar retention in this context is much more relevant for sas businesses and we don't really see many marketplaces that have net dollar

35:26 retention you know transactional driven marketplaces where you know there's there's sort of there is no subscription there's just kind of a transaction concept and people come in and out um to do transactions there are high frequency marketplaces there are lower frequency marketplaces but even the high frequency marketplaces tend to you know not hit these sort of metrics so i would i would say that's the one uh that's the one row here that doesn't um apply as much

35:49 cat payback you know very very relevant um you know these these cap payback numbers i would say can be thought of with with marketplace business is generally the way we think about tax payback in the context of marketplaces is you take all your sales and marketing spend um you know and you you uh divide it by usually the demand side um participants that you acquire in a given period and that's your cac and then your you know your payback is your

36:13 um you know is based on the amount of that the cohorted amount of gross gross profit that that cohort of users uh provides over the period of you know six months 12 months 24 months and you want to make sure you're getting that cac paid back in ideally six to 12 months um as as shown in the great column here and then burn multiple the one burn multiple i think is very relevant the one caveat is you know

36:38 because sas businesses tend to just grow revenue right they don't really you don't really see sas there's healthy sas businesses that sort of shrink revenue month over month whereas in in marketplaces and in transactional businesses you can have you know months that are actually higher than months that come down seasonality oftentimes you'll see like q4 and you'll see a spike in q4 so you may have you know a year where there's you know trending up for sure hopefully at this

37:04 kind of 3x kind of multiple um but there could be months where it actually comes down so because of that concept you can't always look at burn multiple in a um aperture of just one month because you're actually going to have negative growth in a month sometimes so sometimes you have to open up the aperture to look at a quarter or even a year of how much incremental annualized revenue did you generate you know quarter over quarter

37:29 or even year over year and if you look at that annualized revenue growth um relative to the amount of burn you had say in that one quarter or one year you should still be hitting these types of burn multiples so it is also relevant with that one caveat i think those are really the primary tweaks that i would make to the slide in the context of marketplaces uh let me let me address a couple of these other questions about burn

37:50 multiple so um when asked you know um you said that you should aim for a burden multiple of two or lower um especially given probable customer softness even if we're not seeing it yet that probably calls for immediately offset many companies and that is correct that's correct um if your burn multiple is above two you really now let me this is not necessarily true for seed and series and let's come back to that in a second um

38:23 so if you're burned multiple let's say you're sort of at this like um you've already raised a series a or series b and you're sort of in this like growth stage or your next round would be a growth round the availability of growth capital has massively dried up and you really need to have the the great metrics and even if you have great metrics you know if your the deals were the rule of thumb for deals last year was 100 times ar now

38:50 maybe it's 20. so you know if you don't want a down round you're going to need to grow 5x just to get a flat round this is just like sort of rough math i mean every case is different but that's the rough math so you've got to give yourself time to grow into your evaluation and um so yes i mean if you're in that situation and you don't have 30 months of runway let's say uh and your burn multiple's over two i

39:17 would be cutting you know now if you've got like three years plus a runway because you raised so much money last year we have a lot of companies who are in a great who are in great shape because they raised a huge round from tiger last year or one of these other growth funds but i would just preserve that cash as much as you can because the availability growth capital is fundamentally different now and so it's

39:40 wonderful if you made a while the sunshine but you just realize the environment's different now i would so if i were you know under two years of runway or two and a half years of runway and had a burn multiple above two i would personally i would be making cuts right away at a minimum i'd be freezing spending to grow into a burn rate that was more reasonable um but and that again that would come down

40:05 to how much runway out right now if i had like over three years of runway i would be i might be more okay just kind of freezing my cost structure and maybe you don't have to cut but if you're under two years definitely um now colin asked a question how these numbers apply to a cedar series a stage company we still need to build and scale so seed um you know burma doesn't really work for pre-revenue companies right because the

40:28 denominator is net new a or r so if your pre-air doesn't even make sense similarly if you're in the early stages of selling um your r d is just you're gonna have a lot more um product development expense than um than revenue so it's okay in the earliest stages to have a higher burn multiple um but i would be looking then at just how much run weight you have and you need to be asking questions about do i have enough runway to achieve

40:57 the results that i'm going to need to raise the next round so you know at some point you have to make your burn multiple make sense and the question is can you get there you know and can you can you raise money before you run out and i would just say for these early stage companies to stay as lean as possible um you know your job is is in those early stages to find product market fit

41:24 you don't necessarily need a ton of burn to do it anybody doesn't really help you find product market fit like shouldn't be on the team yet um just give yourself the maximum amount of runway um and remember that by the time you do raise your series a round the bird multiple then becomes important so you need to be trending towards a burn multiple that makes sense even if at for example the seed stage it doesn't yet

41:49 on that note there's a lot of questions about more tactical advice on the types of customers that people should be pursuing um if you're if you're selling to other startups does that put you in a riskier position if you have the ability to move up market should you do that are there sectors that are less affected by this than others any comments on the topic yeah i mean this is the yahoo banner advertising problem is during the dot

42:13 com crash it was believed that yahoo was then the most valuable um internet company in the world and it was believed that it would be fairly insulated from um the dot com crash because it had plenty of cash it was public company all that stuff but it wasn't because all those customers were startups and as all those startups ran out of money and died there and started cutting costs yahoo's business basically dried up so yeah you

42:36 do have to be aware of who your customer base is and startups are the most exposure than s b second most enterprise customers generally are considered to be the best customers now that being said you have to pursue customers where you have product market fit this isn't like your customer mix is not something you can change overnight and in general it's good to be able to move up market over time but that takes time because you have to address

43:04 product objections and enterprise customers are more demanding and they have more complicated product requirements and they generally want your product to be more comprehensive and they have more complicated sales cycles so the idea that you can just all of a sudden overnight change your customer mix from s b to enterprise i've seen companies try to do that forced march too quickly and they just it doesn't work so it's something you want to evolve towards if you can but that was probably a

43:32 business strategy anyway but yes i mean if you have a significant startup exposure you just want to watch that pretty carefully what what it may mean is that over the next two years you have more churn than more logo churn than you expected not because your product is bad but just because those companies are going out of business at a elevated rate uh jeff there's a question about um is the financing environment the same at the growth stage as the seed in series a

43:59 stage or is the um there's like rumors going around that seed and a uh rounds are are more insulated still easier to get done yeah i think um my view on this is that uh it's it's all it's all affected by this downturn and um and we're already seeing that david shared the numbers earlier of just like bc dollars being put to work and it's we've seen a dip in q1 uh both in in the growth in both overall

44:27 and in the early stage and um and i and i think we all believe that that dip is going to come down even more in q2 um and it's going to be affecting the early stage as much as you know kind of every other stage i think it probably started in the growth stage but it sort of it kind of it kind of uh get gets uh you know kind of catches everywhere else as well so and i think

44:50 we've already kind of crossed that chasm so i think it's like i think that the narrative that this is only affecting growth stage and it's not affecting c dna is like that's not true um another interesting question one of the ways that series a's can be affected is that the bar goes up i mean not everyone here may remember this but really even just a few years ago like when craft started in 2017 and i remember the

45:16 sas rules of thumb back in 2017 2018 2019 the the the rule of thumb was that you needed a million dollars of ar to raise your series a and and series b was like four to five million and those rules kind of got thrown out the window over this last two year period during covid when you know everybody was basically gaslit by like zero interest rates um they started to think that that's what the world would look like is that

45:43 you know all these future years and 10 years 20 years you could basically start to put a value on them without a discount rate in any event um you know the old rules were one in five so um you know in the last couple years you could raise a series a with say half a million or 300 000. we were seeing people do not us but firms would do crazy series a's over pre-revenue you know i think those days

46:07 are kind of over as well so you have to remember that you don't only need time to if you're a seed company to find product market fit you gotta you gotta have time now to start stacking enough revenue to meet those series a criteria there's a question about acquisitions so you both started companies uh paypal and stubhub in downturns and then you guys both went through acquisitions um does the acquisition environment change in the same way that the funding

46:36 environment is changing yeah it's hard to say how it's going to cut i mean look if you're a company that's lost 80 to 90 of your market cap in the last few months you're not going to want to use your stock to buy you know in an acquisition so there's going to be a chilling effect there maybe the big companies that have a lot of cash get back into the market although they're somewhat stymied because of the regulatory environment in

47:01 washington is like we have the toughest anti-trust um you know policy coming out of washington at the ftc that we've had in a long time so i'd say probably the net of this is is a chilling effect on m a um maybe quite a bit um yeah i mean yes the the problem is just that the companies who could buy you for cash and would like to do that you know again there might be someone stymied by washington whereas the

47:32 companies that would buy you a stock are going to be less willing to do that with price now eventually prices may return to some more normal level and then maybe the m a market picks back up um and of course you know the exit prices will be a lot lower now too so you know we'll see what happens there i don't want to overstate it jeff what do you think i totally agree with that i think m a

47:56 definitely will cool off you know companies get exp when uh you know acquirers get excited about doing m a when when times are good when their stock prices are high when they have a currency in a stock price that they can use to do the acquisition um and uh and so and that's not the case right now um and i think just in general even big companies you know publicly traded companies i think are and even

48:20 companies with lots of cash like are um you know looking at this environment i think are also being more cautious um and uh and less aggressive and i think m a tends to happen when the you know when when people are more aggressive yeah so stevie has an interesting point here what happens when founders don't want to raise money at current prices good companies with strong fundamentals won't raise ever such a problem with those raising funds need to deploy

48:45 capital let's have an upward pressure on valuation in order to find the actual market clear prices for private fines and good companies um so uh it's true that right now part of what's happening in the market is that if if you're a founder and you don't need to raise you're not out there raising i mean it's a terrible environment right so there's this is one of the reasons why you'll see in q2 a huge fall off in the number

49:11 of deals is that if you could raise last year especially in the second half of last year you probably did so there aren't like as many companies that need to fundraise right now and so if it's optional for you you're probably not doing it but what you're going to see is towards the end of this year and certainly going into next year there's gonna be more and more companies that can't wait anymore and they're gonna be

49:33 forced to raise and then we're gonna get a lot more data points on valuations um and the the new price levels will sort of completely gel because founders won't be able to resist those levels anymore i think we already kind of know where they're going to be but um but yeah you're going to get a lot more data points later in this year in terms of is there pressure on vcs to deploy capital um you you just have to remember that the

49:58 pace of deployment over the last couple years was the anomaly so you know these one-year pace deployments these funds that's going to slow way down you know two years plus used to be the old pace of deployment so even funds that have capital are going to be deploying it more slowly also there are going to be a lot of new vcs in the market who simply can't raise new funds um you know lps are their portfolios

50:23 have been hammered too and they may be allocating less money to bc in the next year or two and they may be getting more selective about which managers they're going to choose and then of course finally like i said the amount of crossover money from non-traditional investors that's going away completely so there will be a lot less money coming into the ecosystem over the next two years and it's going to be deployed more slowly so yes we're in the job vcs are in the job

50:51 putting money to work but they're going to be much more selective about it over the next two to three years and the only other thing i would add to that and i think we might have touched on this earlier in the slides is you know there's a narrative about how like all this money's been raised by vcs in the past couple years and so it's so it's there it needs to be deployed and you know that's partly true but the

51:12 piece of that that is um you got to remember is because because the pace of deployment in 2020 and 2021 was so fast that even if you raised a fund you know even in 2021 many of those funds are you know 50 60 70 deployed already and the remaining 30 or 40 is reserves for the portfolio companies especially at the earlier stage where funds you know keep reserves for existing portfolio companies and if anything

51:42 you know the funds want to keep more reserves right now because they're looking at this environment saying they need more reserves for their existing portfolio companies um you know so there's so there's you know there may be less money than than people think um that that's already been raised so so part of it has to in order for there to be more venture capital it needs to be raised in the future which you know which is which is

52:06 going to be more challenging for you know for some for some newer venture firms yeah i mean remember that slide on tiger the 12 billion dollar fund that they just announced in march it's already gone and we have a bunch of companies that raise growth routes from tigers so god bless you but um i mean those those giant tiger rounds were a beautiful thing but i you can't assume that the money that they're going to be there in the future um by

52:32 the way there's you know a lot one of the objections that that you always hear in vcs talk this way is um is you guys are just talking your book you want prices to be lower all that kind of stuff i think it's important to understand here that um the market really sets the the prices and valuation levels in good times or bad times we're price takers the markets that's we just choose we want to be in

52:53 business with and our only motivation here in doing this call today is making sure our portfolio companies survive we do not want you to go bankrupt that's 100 of our motivation and reacting to the new realities on the ground as quickly as possible and i think vc's this is one area where i think we are better positioned than founders to see what's happening because we are in the market for capital uh every day whereas you guys kind of only you know poker heads

53:22 up every year or two as you need money so you know we're telling you what's happening and you'll you know you can read similar things online from other people are in the capital markets but our goal here is just to give you guys the information obviously it's your companies you run them but giving you the information so you can adapt as quickly as possible and then you know survive this downturn okay one related point to end on since

53:47 we only got one more minute there's kind of this implication that q2 is going to be rough and that maybe this is going to last for two years what are some of the leading indicators that we'll know we're making our way out of this period well i think you want to pay attention to at the macroeconomic level interest rates are going to matter a lot and inflation is going to matter a lot so um and then you know you can look

54:11 at like stock market prices and valuation levels um you know you can look so so i mean in the same way that the vc market took us cues from the public markets on the way down they will take their cues from it on the way up as well remember we still have a recession that's likely coming in the next six months so we gotta you know there could be more shoes to drop here and i would i would only add to that um

54:35 you know gdp growth uh company revenue and company like public company revenue and earnings um you know we'll probably see you know gdp growth be negative again in q2 maybe beyond q2 and as that starts to recover and start to be positive again as well as um you know just companies companies you know p l um and uh and there'll be some bellwether uh companies that i think will start to you know start to sort of show the

55:01 performance of the broader economy okay we're out time this was a great david jeff thank you and um we'll fall with everybody thanks for joining hopefully this was helpful and um yeah just everybody at craft wants to be helpful in this time so make sure to talk to your point of contact or anybody else on the team yeah and actually the only other thing i want to add to that about the craft being um helpful is you

55:23 know we do have a large platform team now um including people that can be helpful in um you know in lots of these different types of questions including things like layoffs so you know if you have any questions about that or want our input we can certainly you know connect the dots on that and try to be helpful there great okay that's it thanks everybody thank you