These Two Questions Are All You Need To Understand The Next Few Years of Venture & Startups

Why I’m Not Telling Every Startup To ‘Pull The Brakes’ Just Yet

Here’s how I’ve generally described what’s occurring in tech land over the last few months:

• For a variety of reasons, technology companies were being rewarded with valuation multiples which far exceeded historical norms and the view on their growth rates, amount of capital they could/should spend to capture revenue/market share, etc were incredibly rosy.
• Similarly, for a variety of reasons, the music stopped. Multiples dropped in public and private markets, growth expectations were cut, and business models with high spend for promise of future ROI became quite unfavorable.
• The ‘valuation multiples’ reset also came with an increase in slope of the curve. ‘Great’ companies took 1–2 steps backward, ‘good’ companies 3–4 and ‘average’ companies 5–7 (symbolically). As a result, there’s a lot of incentive to remain a ‘great’ company, which is still venture investable, versus falling into a trough of uncertainty.
• But you need to remain great and investable while also managing your costs, extending your runway, tightening your operating plan, and so on. Not buying low quality growth. This is challenging but definitely not impossible.
• What’s the biggest open question for most companies in remaining ‘great?’ Top line growth and margin. Are you indispensable for customers? Do you understand your cost structure and can you manage to a forecastable growth rate. And so on.
• Continually missing top line projections in this environment is DEATH. Your runway is impacted by the absence of projected revenue. A drop in growth rate turns into a drop in valuation multiple. And your investors start to worry that you don’t have a great handle on your business, which means any new capital infusion could be eaten up without getting to the next milestone successfully.

Let’s avoid giving overgeneralized advice such as “every company should have 36 months of runway” because it’s just not true (and sometimes destructive, per Sam Lessin’s tweet and David Sacks ‘default investable’ framing).

Instead I’ll suggest there are two specific questions that really matter, the answers to which will have the biggest impact on the next 1–5 years of startups and venture capital.