From: allin
The landscape for venture capital and startups is undergoing significant shifts, with investors urging companies to prepare for prolonged economic uncertainty. Emphasis is placed on robust financial planning, strategic talent acquisition, and strong governance to navigate current market conditions.
Current State of Venture Capital
There is a consensus that a significant amount of capital injected into venture capital is at risk.
“Since 2018 through 2021 and including an estimate for 2022, we have injected one trillion dollars into venture capital” [01:14:21].
However, an estimated 100 billion or more from older vintages, leading to a total destruction of 700 billion in paid-in capital [01:14:48]. This represents a significant impact on venture capital and investment portfolios [01:13:56].
This period is characterized by:
- Drawdowns: The full impact on portfolios is just beginning to be realized [01:13:56].
- Company Closures: Many companies are “taking the medicine,” shutting down, and giving up on raising money [01:15:46].
- Talent Consolidation: “Aqua hires” are occurring, where highly talented individuals (who might not be suited for a CEO role) from larger corporations or failed startups are consolidating into other startups or smaller companies [01:16:08]. This includes people who previously had peak compensation of 700,000 annually [01:16:26].
Startup Survival Strategies
In light of the challenging economic outlook and the potential for a double-dip recession, startups are advised to implement stringent financial planning and operational discipline.
Financial Runway
Startups should plan to have sufficient cash to last through the first quarter of 2025, ideally maintaining 8 to 9 quarters of cash runway [01:13:28]. This extended runway is crucial because:
- Investor Sentiment: Most venture investors will require at least six months of positive on-the-ground data before their sentiment shifts and they become more open to new investments [01:13:47].
- Economic Uncertainty: The forecast includes a potential double-dip recession and persistent inflation, which could keep interest rates higher for longer (around 5.5% through mid-2024) [01:13:00].
Operational Discipline
- Cost Control: Companies need to implement austerity measures and focus on the bottom line, moving away from a focus solely on culture and features [01:23:03].
- Return to Office: Leaders like Elon Musk at Twitter are setting new baselines for in-office presence, requiring employees to come to the office unless they are exceptional performers with good reasons [01:17:44]. This contrasts sharply with previous periods where remote work and flexible hours were prevalent [01:16:43].
- Shareholder Value: Management teams are urged to consider shareholder interests and demonstrate how their businesses are worthy of investment [01:19:33].
- Accountability: Employees should hold management teams accountable by asking critical questions about financial health and survival strategies during Q&A sessions [01:23:31].
Governance and Regulation in Private Markets
A significant issue highlighted is the lack of governance and diligence in private markets, especially given the “velocity of capital” in Silicon Valley [01:51:33]. The FTX situation serves as a prime example where there was a clear absence of a functioning board, proper oversight, and clear segregation of funds [01:51:51].
Investor Education and Access
To address these challenges and strategies in startup ecosystems, there is a call for a more sophisticated investor framework.
- Accredited Investor Rule: Currently, only about 6% of the U.S. population qualifies as an accredited investor [01:02:05].
- “Driver’s License-like Test”: A proposed solution is a mandatory “driver’s license-like test” for those wishing to invest in private companies, NFTs, or complex tokens [01:02:13]. This test would ensure investors possess a basic understanding of the asset class, including diversification, the “power law,” and the high likelihood of losing money (70-80% of investments going to zero) [01:03:00].
- Democratizing Access: The goal is to allow more Americans to participate in risk capital intelligently, while preventing “grifters” from exploiting unsuspecting investors [01:05:41].
Regulatory Framework for Crypto
The discussion strongly emphasizes the need for a clear and constructive regulatory framework for crypto within the United States.
- Clarity on Securities vs. Commodities: There is a lack of clarity regarding which crypto assets are commodities (regulated by CFTC) and which are securities (regulated by SEC) [02:29:57]. This regulatory ambiguity has pushed significant crypto business offshore [02:37:39].
- Stopping Illegal Practices: The SEC and DOJ are expected to scrutinize other tokens and token sales, especially those manufactured and sold by venture capital trends and fund management firms with “special rules” for liquidity, effectively creating unregulated securities [00:53:34]. Some firms reportedly taught teams how to create and dump these tokens [00:54:39].
- Onshore Operations: Regulation should mandate proper governance, insurance, and on-shore operations in the U.S. for crypto businesses [01:01:50].
- Political Motivation: The FTX collapse has turned crypto regulation into a highly political issue, leading to a strong impetus for regulators to act quickly and potentially “drop a hammer” to protect mom-and-pop investors [01:03:05].
- Future of Crypto Investing: Investing in tokens is expected to become highly regulated, shifting focus towards investing in corporations [01:00:40].
Overall, the sentiment among venture capitalists is that it’s “Grind Time” for startups, emphasizing financial discipline, strategic planning, and adapting to a new, more regulated and scrutinizing market environment [01:22:18].