The VC industry was hotter than ever in 2021 and everyone invested in future Unicorns and Decacorns. These are the kind of stories we all read on the news.
Founders with revenue traction were pitched all the time. Venture Capital firms had become the “sellers” whilst Founders were the “buyers”.
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What have been the consequences of the 2020-2021 VC bubble and its unreasonable valuations?
- Not enough exits.
- New rounds in portfolio companies with lower valuation than previous one.
- The challenge to raise additional Funds.
VCs and Private Equity invested in potential “Cinderellas” and then soon realise it may be one of her “Stepsister” instead.
How to detect that the risk is high:
- The startup keeps on burning cash.
- It generates low pipeline and revenue compared to the ambitions and plans.
- The reasons listened during the Board meetings: generic with tendency to buy time without showing outcome/fact-based plans, blaming the pandemic, the war, the VP of sales, the secret recipe will be the next feature in development that will generate the tipping point, and others…
VC exits do not have yet a base of revenue and process engineering.
They are still too much linked to probability calculation and randomness.
Betting is ok when it’s a pre-revenue startup developing the “Beta” or looking for product-market fit.
Is it still ok when you invest in series A and B, post initial traction, and therefore you expect the startup to accelerate revenue in 1-2 years?
If you go for winning the Champions League and soon realise that you need to fight to avoid the relegation, this is painful for all involved parties (Investors, Founders, Employees). Isn’t it so?
As a VC are you willing to accept the idea of a write-off? Or even worst, that the company will survive without any exit?
What should be the plan?
Consciousness – Reinvention – Restart
Many of these companies (and most of this money) can be recuperated if you bear in mind that there are no shortcuts in B2B SaaS.
Firstly, a serious exercise of self-consciousness at Board level is a must have.
At least when you are in the “locker room” with your team, don’t behave like the Chicago Bulls of Michael Jordan if the reality is that you need to fight to avoid relegation.
Secondly, you should have a frank and open Board conversation about a possible exit strategy and timing.
Once the above is done the whole focus in the following quarter or two should be to reinvent and restart the engine.
A control room should be built on purpose and a new roadmap/therapy should be created with a few priorities in mind:
- Refocus the company on efficiency before growth. Cash will be king in the next 1-2 years even more than ever.
- Decide the appropriate strategic go-to-market focus in the short term, in no more than 3-4 months.
- Understand which “postures” and “fundamentals” of the go-to-market strategy need to be refocused and how?
- Is it segmentation and ICP?
- Does the value proposition or pricing/packaging need a rework?
- Do you have the right go-to-market playbook in place?
- Which people are going to work well in the new phase and who do you miss?
- Align the Board on clear and measurable milestones towards the build up of revenue predictability.
- Which outcomes do you need to reach in the next 6-12-24 months?
- Plan and execute in real time. The Mantra is Execution-Execution-Execution with an obsessed focus on efficiency and the stabilisation of the business from a financial perspective: stable & predictable cash production and positive EBITDA.
As said you should have in parallel Board conversations about the possible exit plans so that at the right time the business will be ready to look for the right M&A operation with a time frame that ideally should not be longer than 2-3 years.
The sooner the better.
How much value is every shareholder leaving on the table each day of delay?
Often Founders and Boards succumb to the shortcuts and hire pedigreed VPs instead of following a more sensible approach, in a desperate attempt to regenerate revenue quickly.
Going all in just for the seasoned champion doesn’t work 99% of the times. It means to burn the residual cash that could have been used to reinvent and restart the business in line with what mentioned above.
Should you aim to the next VC round or an M&A ?
Let’s assume the Board and the Founders have put the feet on the ground on time and the business has started to execute in line with a sensible “reinvention” plan.
What should be the foreseeable exit strategy for the VC who invested: aim to a new VC round or an M&A?
It’s not possible to answer such a question before 9-12 months. It depends on how the business will react to the “therapy”, assuming that the portfolio company still has got a role to play in its sector and the product is still competitive.
The necessary condition in both cases is that the company should not run out of cash in the meanwhile. The pursuit of break-even or in any case a good level of financial stability will make the difference between life and death.
The “re-birth of Cinderella” is an exception though. The most likely and reasonable approach in many cases is to go for an M&A plan.
For a B2B SaaS company the M&A scenarios could be of 3 different types:
A) A high growth VC-backed unicorn/decacorn scaleup could be interested in buying your company’s MRR, additional market presence and/or cross selling opportunities. From a valuation perspective this is probably the best possible scenario.
B) A big Corporation may have a gap in its offering and a good and specialized SaaS solution like yours can represent an appealing integration to the current product portfolio of the corporation.
C) A Private Equity firm shopping around for good opportunities. A possible downside in this case is the valuation but there are cases where the M&A should be considered as a profit on its own, given that the most likely alternative would be a write-off or a business surviving without an exit. What would be the worst scenario for a VC?
This article was written originally in 2020 and updated in May 2022 and then October 2023. The essence of the original message has not changed.
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