Focus on profitability overtakes mantra to grow at any cost

Not very long ago, when capital was abundant and cheap and start-up valuations were soaring to heady levels, founders were under pressure to pursue to “growth at all costs.” Now, with inflation at a 40-year peak and government efforts to contain it stoking greater recession fears, investors are pressing founders to steer their companies toward profitability.

That was a recurring theme across multiple sessions of the fourth NYC Summit, hosted by Primary VC and Inspired Capital, on September 7-8 in the Flatiron district, home to much of New York’s venture and start-up activity.

“The trade-off between growth and profitability is inducing a more balanced posture,” Liza Landsman, GP at New Enterprise Associates, said during a panel on how macroeconomic headwinds are shaping the start-up market. For later-stage companies that are being forced to cut costs and spend more judiciously, “having those muscles built before they go public is a good thing,” Landsman said.

For some start-ups, however, capital constraints have exposed structural elements of their market strategies that are fundamentally unsound and that can’t be fixed by adjusting valuations, said Harley Miller, founder and managing partner at Left Lane Capital.

“Many start-ups are in a holding pattern of very modest growth, but still burning through a lot of capital,” Miller said. “We’re seeing founders towing the line [of investors calling for spending cuts] and cooling off just enough to [appease] investors who are buzzing in their ears, but keeping some semblance of [their] growth story.”

Roughly 1,500 entrepreneurs, investors, lawyers and other advisers attended the conference. Excitement in the crowd that packed into the Metropolitan Pavilion was palpable after a two-year hiatus imposed by the covid-19 pandemic.

For Alexa von Tobel, founder and managing partner of Inspired Capital, which co-hosted the summit for the first time this year, the annual gathering is a way to support a venture ecosystem that “I wish had existed when I was starting my first company.”

“We wanted to create an event that would foster the serendipity and connection that happens from being in-person,” von Tobel told Venture Capital Journal on the sidelines at the event. “It’s time for us to get back and be in a position to foster relationships” among founders and investors.

Many speakers commented on the growth of New York’s venture industry relative to that of Silicon Valley. In his opening remarks on September 7, Primary VC co-founder and GP Brad Svrluga noted that the number of seed deals completed in New York rose from 45 percent of those done in the Bay Area in 2010 and 2011 to 70 percent in 2020 and 2021. In the same period, investment in New York-based VC funds relative to those in the Bay Area nearly doubled from 22 percent to 42.3 percent, Svrluga noted.

The next day, Kevin Ryan, AlleyCorp’s founder and CEO, said more people now work in New York’s tech industry than on Wall Street and predicted the city would supplant Silicon Valley as the largest start-up center in the US within the next 10 years.

One of New York’s key advantages as a center for VC is that it’s a place where many young people want to live and has attracted more young people who want to innovate than anywhere except for San Francisco, General Catalyst managing director David Fialkow said in a third session.

The abundant institutional knowledge in the operating part of the industry that resides in New York makes it easier for VC firms to bring in experienced operators to help build portfolio companies, Fialkow added.

Web3, women’s health, climate tech and more

Other sessions focused on the next wave in fintech, arguments for and against crypto and web3, the future of health tech and climate tech, the roles of incubators and accelerators, and addressing social needs such as women’s health. Plenty of thought-provoking ideas were disseminated through brief, back-to-back panels, but networking and building relationships were clearly the Summit’s main event.

One Atlanta-based founder told VCJ that while it’s not his natural inclination, the Summit’s welcoming atmosphere had made him feel comfortable walking up to strangers and starting conversations.

Government heavyweights such as SEC chair Gary Gensler and former US Treasury Secretary Robert Rubin were on hand virtually and in-person, respectively, to share thoughts on regulation’s role in private markets and macroeconomic reverberations on venture capital.

But keener insights emerged from panels like one on web3’s future, where Matt Homer, a former regulator at FDIC, noted a dramatic transformation from 10 years ago to an all-in focus among regulators on web3, among other VC sectors.

Regulators are grappling with how to apply existing rules regarding capital markets to the crypto space, how to expand their jurisdiction in the space and the risk of saying “no” to the innovation that’s occurring, said Homer, who is now executive in residence at fintech-focused Nyca Partners.

“The big existential question looming is what do you do with intermediaries or how will intermediaries look different?” Homer said. Other questions include whether to regulate blockchain code or continue to treat it like free speech.

“The founders [in web3] who succeed will be those who can build within a regulated environment,” Homer added.

Lingering effects of pandemic

Although the pandemic seems to have receded from top of mind, its enduring impact could be felt at this year’s summit. In the first session after opening remarks, Bonobos co-founder Andy Dunn spoke about learning how to manage his bipolar illness after years of denial and a stint in Bellevue several years ago. Dunn made a case for founders opening up and showing their vulnerability, enabling them to connect with others.

Although Dunn said, “it’s in your self-interest to be known for who you are,” he added that disclosure needs to be strategic. “Do it after you close your first [fundraising] round,” choosing the right time within the following six to nine months to have a conversation with your new board members about your condition, he advised.

One of five entrepreneurs is likely to have some kind of mood disorder, according to academic research. Dunn urged founders to take an hour once a week to unburden themselves about whatever is causing them stress with someone independent of their personal and professional lives – whether that person is a therapist, psychiatrist or an executive coach. And to eliminate all excuses, Dunn advised start-up execs to expense the professional help to their companies because “an investment in the mental health, well-being and leadership of its founder is worth it.”

Acknowledging how hard the past two years has been on everybody, von Tobel at Inspired said, “We wanted to say, ‘We’re back, but we’re back differently.’ Being together matters and being authentic matters. Being an entrepreneur is extremely hard and having supportive relationships is very important.”