Transformation in venture banking can help us get back to basics: efficient growth

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With the collapse of Silicon Valley Bank founders are in a predicament when it comes to raising equity or debt. Most companies run their business on equity alone and have access to a venture capital facility. Access to venture capital is a “break glass in case of emergency” facility, as it allows companies to not be so hardened when they need to raise, rather than being tied to corporate milestones. When a majority of the venture capital market slows down or pauses new lending, one thing is certain: this loss of runway capacity will inevitably lead to behavior change on all sides.

And a change in behavior, or a reset, is badly needed. Prior to this additional chaos, the funding environment for startups was already challenged. The reality is that most founders and venture capital funds don’t know what the market price is for startup valuations right now – and now an opportunity for some sort of reset is presenting itself, not on valuations, but on what we as an ecosystem do with its precious money .

We know that if a founder were to raise their 2021 capital round at today’s multiples, the effect would be significantly more dilutive, which is why embracing a cash-efficient approach is important. Combine a slower stock market and less debt capacity/flexibility, you come at a time when founders need to raise more equity at higher dilution or be more efficient with less.

The reality is that most founders and venture capital funds don’t know what the market price is for startup valuations right now.

A retro cool phrase that is experiencing a resurgence in our industry is efficient growth. Even typing feels like the paint is drying because when this phrase is uttered people can’t help but jump to stats like CAC/LTV, fire efficiency, OpEx ratios and of course the good old rule of 40. Efficient growth is a major talking point among investors, and I’ve long been a proponent of it, but that mindset hasn’t really been top of mind in the industry in recent years.

With a lens on early stage investments (Seed to Series B), here are a few things that I think resonate with VCs right now and the factors founders should consider when planning and executing:

Efficient economy per unit drives growth

The multi-year customer acquisition cost (CAC) payback is not until 2021. Understanding how to do more of the same profitably is key to efficient growth and finding a VC to fund that growth.

  • Change the mindset of growing the business to that of an inchworm. Grow the OpEx ahead of results to support and enable growth, but toll gate it to prove you can catch up. As you see growth, expand. In the past few years, companies assumed that funding rounds would come to fill voids when there was a timing miss – that no longer exists. Grow in the OpEx and expand sequentially.
  • Move from a serial mindset to a parallel mindset on product and growth initiatives.