Cutting the burn rate

For entrepreneurs, the belt tightening has begun.

Hiring plans are being placed on hold and core engineering prioritized. Companies once seeking senior sales executives with large Rolodexes are making due with mid-level hires driven as much by energy as experience.

Some founders are sending overseas product development they hoped to confine to more-expensive, close-knit local teams. Others accept fewer key customers so they’re not distracted by excessive user demands and the costs of satisfying them.

The result may be slower near-term growth. The benefit may be long-term survival.

With the venture business headed into a correction, sparked by unrealistic unicorn valuations, companies across the food chain are feeling the impact. Raising money is becoming more difficult, and only those startups with sustainable growth rates and clear paths to profitability will win the support of an increasingly cautious venture community.

Many VCs are convinced the readjustment will bring down rounds and unicorn failures. Whatever the course, investing in 2016 is sure to feel the pinch.

Michael Kim
Michael Kim, Cendana Capital

“VCs will be held hostage by high valuations from the hot money now leaving the market,” said Michael Kim, a managing partner at Cendana Capital.

The result is an environment where insider and pay-to-play rounds could play a bigger role.

Already, some entrepreneurs have lowered their expectations for round size and valuation to meet the new realities. More are likely to follow suit.

According to a survey released in December by First Round, 99 percent of late-stage founders and 97 percent of Series A founders anticipate a more difficult or similar fund raising environment over the next year. More than half said the negotiating power would shift back to investors.

Kim says he’s already seeing pressures filter down to Series B transactions. Deals that used to win $60 million to $80 million pre-money valuations are coming in at a $40 million and $50 million valuations, or less. “Our fund managers are reporting that Series Bs that would have been higher are coming in lower,” he said.

Of course all this may be healthy in the long run. With public market IPO investors more skeptical of venture-backed tech IPOs, rebuilding the bridge to the public markets is a critical job.

Right now, the bar for new issues is higher, said Samuel Wilson, head of investor relations at MobileIron. Part of this is due to general market volatility, expectations of higher interest rates, the anticipation of a stronger dollar and perceptions that the country is late in the economic cycle, he said.

Another part of the equation is company specific. Investors continue to pore over financial models seeking growth rates and paths of profitability that they like.

Until these appear, “public investors in general like to watch VCs squirm,” Wilson said.

They may have a chance to do just that.

Photo illustration of belt tightening from Shutterstock.