Last year’s shortage of startup funding forced many founders to stretch their cash piles: Following the advice of investors, they closed offices, laid off employees and slashed software costs.
Efficiency is a key feature of any good business, but Tom Rabelo, an investor at IVP, a 44-year-old Bay Area venture capital firm, doesn’t think startup founders should hit the brake pedal.
The venture capitalist who accurately predicted a “startup mass extinction” over a year ago says the worst is over. “We are on the brink of a great reawakening for startups,” Rabelo wrote in a LinkedIn post.
With the cloud software market stabilizing and venture funding once again available to talented startups, Loverro is calling on startups with healthy unit economics to increase their cash burn to accelerate their progress.
“Your existing customer base is no longer in burn mode,” Rabelo told Business Insider in an interview. “Now is a really good time to start thinking about going on the offensive responsibly.”
Over the past two years, many startups have scaled back sales and customer support and abandoned new products and ideas.
Lovello recalled speaking to his portfolio companies at an all-hands meeting last spring, where he urged his team to stay laser-focused on what was most important to the business. “And that means, at least, you can’t do everything at once,” Lovello recalled saying.
Some companies have curbed spending and emerged from the bear market in a better position to raise capital, while others remain in a death spiral. Earlier this year, TechCrunch reported that Ghost Autonomy, an OpenAI-backed startup that makes self-driving car software for automakers and had raised nearly $220 million, shut down, as did The Messenger, an online news site that launched with $50 million in funding.
There is a growing view among some investors, including Mr. Ravelo, that Darwin has outlived its usefulness, and that the surviving startups should start investing in growth again.
“It’s a bit of Stockholm syndrome. 2022 and 2023 is a bad economy, everything’s gloomy, and it’s very easy for directors and founders to just hang in there,” Rabelo said. “I’m trying to shake people up a little bit and say, ‘Wake up, the macroeconomics have changed again.'”
He pointed to two data points that signal the software economy is on the mend. Jamin Ball, an investor at Altimeter Capital, which holds shares in public and private companies, has been tracking the performance of more than 60 cloud software stocks. The median quarterly growth rate for these companies rose slightly in the first quarter from a trough in the previous quarter, Mr. Ball wrote in June.
Ball also observed a leveling off in net dollar retention, a measure of a company’s ability to retain revenue from a group of customers over a period of time. A high net dollar retention rate means that satisfied customers are spending more at a higher rate than dissatisfied customers are churn.
The median net dollar holdings of the stocks Ball tracks fell 4 percentage points from 120% to 116% from the fourth quarter of 2022 to the first quarter of 2023. It had been falling all of last year, but the rate of decline has slowed in the past two quarters, Ball said.
Mr. Rabelo says startup founders may be tempted to wait to hire more salespeople or invest in new products until it’s clear the economy is improving. “In the startup world, that’s too late,” Mr. Rabelo says. The smartest founders will understand that the software market “isn’t in a tailspin anymore” and start growing while the market is “good enough,” he says.
On LinkedIn, Rabelo shared four strategies for CEOs to “go on the offensive responsibly.” He instructed them to set company goals with “stage gates” that would trigger additional spending. For example, if a startup’s salespeople hit their $1 million sales target in the first half of the year, they would be given the budget to hire five additional account executives.
Rabelo also encouraged founders to try new things: If a new product is working, founders should “push harder” by increasing their budget, Rabelo wrote on LinkedIn. If it fails, founders “should be ready to move on to the next step immediately.”
Finally, he mentioned the impossible: AI. Every business needs a machine learning or big data strategy to stay competitive, even if they can’t yet imagine how the technology will impact their company.
Lovello recalled the advent of mobile. “Even if you weren’t Uber, you couldn’t just stick your head in the sand,” he said. “Everybody should have been concerned about the impact of mobile.”
