A growing number of investors are beginning to suggest that certain venture-backed startups that have yet to find so-called product-market fit throw in the towel. A lot of money raised, a valuation that never grows, and a clean, well-planned exit is better for everyone than a messy exit. After all, money can be invested in more impactful things. can be greatly improved.
A reasonable suggestion. Working on something that isn’t working can be soul-crushing. Still, I doubt many founders will give up companies right now for many reasons. Fundraising is tough, so raising money for another startup is no easy task. It’s a lousy job market and most founders feel obligated to take care of their employees. Among them is the famous Slack, whose team first tried to create a game called “Tiny Speck”. If an investor recently gave a founder a lot of money (if her $10 million+ funding sounds like too much for a company with no product/market fit), it’s really the investor’s own fault. is.
Wanting to investigate this issue further, I contacted Gokul Rajaram, a well-known operator and investor today. Tweet Or “[m]Founders who raised a significant amount of funding ($10M+) in 2020-2021 but then realized they had no money [product-market fit], is now on an excruciating psychological journey. ”
Pinterest and Coinbase board member Rajaram added on Twitter that an early shutdown could be a “graceful move” for stressed-out founders, so it’s questionable whether it’s realistic given the current market. He argued why it was in the email conversation, here lightly edited for length:
VCs don’t lose investors by shrinking the amount they raise, but they want founders to get some of the money back. Can you see the connection?
that’s a great question. I don’t think the two behaviors are related, at least not yet. If you say VCs have started returning capital to LPs, you see some similarities. VC returns capital to LP. Because their mandate, fund size, [and so forth]Founders who give money back do so because they can’t find the right business idea for their skills, team, or customer focus.
Do you think pivots are overrated? Or do you think the company can only pivot a limited number of times before it becomes clear that the team itself is at fault?
Many great companies were formed from pivots. Twitter (Odeo) and Slack (Tiny Speck) are two of his examples of great products and businesses that have come about as a result of pivoting. In my experience, most founders, if they find the initial idea unpersuasive, at least he tries one turn. This means solving different problems for the same set of customers or using previous knowledge, life experience, and skills to solve problems. another problem.
Each pivot takes a toll on the company. Before employees start to wonder if there’s a way to go insane and lose faith in their founders, there’s more than one company can do. I think you can keep pivoting indefinitely if you’re a two-man company that doesn’t raise a lot of money. The more people and capital involved, the harder it will be to pivot after pivot.
How much money is it reasonable to spend on the road to finding Product-Market Fit? without it Product-Market Fit was heavily funded to begin with.
In general, the rule of thumb is that you should use seed rounds to find [product-market fit]That means $2 million to $3 million in capital in a reasonable time. What happened is that in 2020-2021, some companies will: [product-market fit]probably due to behavioral changes due to COVID.
Second, FOMO/excess capital was chasing “hot” deals. So, in two years, he’s stepped away from the fundraising stage gates that have been the norm for several years.
much cheaper and easier to find [product-market] We strongly believe that 95% of the software products out there can be understood without writing a single line of code, thanks to no-code tools. We will discuss that on another occasion.
Aside from perhaps some immediate relief, what are the advantages for the founder to throw in the towel and give back some of the money she or he has raised? Are there any arguments to increase the likelihood of future funding?
It’s just a trustpoint. Investors believe that entrepreneurs can clearly see if they are doubling the value of their time spent. Time is the ultimate currency for entrepreneurs. If the time cannot be converted into increased equity value, at some point the company will need to be wound down or sold.
I have never been involved in a capital return scenario before this cycle. He knows of one company that returned his 70% of capital during the 2001 cycle after all closed. Also, one of his co-founders was able to pull off a successful round a few years later, but it’s unclear if that’s correlation or causation.That said, investors are clearly aware of the sunk cost fallacy and I disagree. [one’s] Funding odds change based on whether or not you return capital.
Do you think running out of runway hurts the founder’s chances of raising money for another company later on?
Not at all. If there’s one thing investors love about him, it’s an entrepreneur whose previous startups weren’t very successful. Whether the entrepreneur ran out of money or was refunded is not important in the calculation. first company. Giving money back shouldn’t be seen as a shortcut to your next round of funding, but instead, you can escape the psychological burden that endless pivots bring to founders and other stakeholders. .
It used to be the decision of the board of directors whether and when to close the company. I suspect the VC has given up a lot of rights due to the checks he issued in 2020 and his 2021, so they can no longer shut down the company as easily as they used to.
If something unethical is going on, like a founder withdrawing an exorbitant salary, investors and board members have a fiduciary responsibility to step in and stop it. But when founders simply place bets on themselves and their professional lives—pivoting—most investors expect them to keep fighting until the entrepreneur himself decides to give up. forgive After all, an entrepreneur has only one company, but an investor has a portfolio.
What more investors can do is give entrepreneurs a safe place to go and it doesn’t matter if they return the money or close the company, the options are entirely theirs but they are the options available to them. to be, to let them know they are not. Doing so will disappoint someone. It is by no means an entrepreneurial scarlet letter.
Based on conversations with other investors, do you believe there is increasing external pressure to return the funds to the founders?
It is self-imposed pressure by entrepreneurs. The bigger the round an entrepreneur raises, the higher the expectations. I think companies will have some options in the coming months. A.) If you don’t have [product-market fit] If you don’t raise much money, you’re forced to exit because the company is short on cash. B.) If you don’t have [product-market fit] Now that you’ve raised a lot of money, you can try pivoting once or twice, but then everyone’s tired. A possible exit in this scenario could be an acquisition-hire, downsizing, or small acquisition. C.) if they have [product-market fit] A company may need to make a down round if it has raised a lot of money but the valuation doesn’t match the traction.
GGV’s Jeff Richards is great director Companies with the most employees [net promoter scores] It was the one that raised the down round. Isn’t it funny? There’s a palpable sense of relief when the sword of Damocles of insane valuations hangs over you. It’s okay to take down rounds. It’s not the end of the world.
I think a lot of founders don’t want to put their capital back in this current market because more people might struggle to support their families. Do you have any advice for founders on this front?
I firmly believe that companies have a duty and an obligation to treat their employees well. And I think making the decision to close the company early means more severance pay that can be given to employees. The longer we wait, the less cash we have to support our employees during the transition period.
