Most VCs won't really give up on an investment if they know the founders are truly giving it 100%
But if they sense otherwise, they check out fast
— Jason ✨2022 SaaStr Annual Sep 13-15 ✨ Lemkin (@jasonlk) September 18, 2022
So there is a lot of triage going on in VC land these days. VCs have to figure out where to put their money, and their time, when the public markets are still down 50% from their peaks and late stage, follow-on capital has almost evaporated.
Things are still very good in SaaS. The top Cloud and SaaS leaders are growing faster than ever. But the public markets are brutal, and it’s rippled all through venture capital.
So, even more than usual, VCs have to decide what to do with their struggling startups. I don’t mean the ones 100% failing. Those are just written off, both financially and mentally.
No, I mean the ones whose growth perhaps has radically slowed, or still hasn’t quite taken off. That aren’t running out of cash tomorrow, but may run out 12-18 months down the road.
The thing is, VCs know 3 almost conflicting things:
- The best startups just grow at an insane rate, at least most of the time. It’s the only way to really go public and get to $100m+ ARR in 7-10 years, or ideally, faster. And yet …
- Almost all the top startups had one rough year. Not all, but most.
- And every single startup has a rough quarter or so with some frequency. Sales is still a human-driven business.
So VCs have to decide … is a struggling startup in a spiral they can’t pull themselves out of? Or is there still a chance they’ll pull up, and get back to hypergrowth?
- I.e., is it a Green Light company going through tough times?
- A Yellow Light company that might pull it out?
- Or a Red Light company that’s really a write-off already, and sort of the walking dead?
The truth is, the numbers alone don’t have the answer. My top 5 unicorn and decacorn investments all had a rough year. Two of them went from 100% growth one year to 40% the next in one Year of Hell. Three had VC rounds where no one would step up. No one.
So VCs are looking for signs you might turn that growth around:
- Are the investor updates still prompt, open, and honest?
- Is there a clear plan to return to growth?
- Is there an honest and accurate root-cause analysis of why growth has slowed?
- Are the founders still hiring great folks?
- Can the founders hire one or two Great VPs that will help reaccelerate growth?
- Are the macro trends still positive? I.e., is there still no reason it can’t be a unicorn? And do the founders still understand why they can win?
- Is there the right type of urgency? Is the company stepping it up, with a clear roadmap and path to getting to more product-market fit?
When you see all or most of the 7 criteria above happening — really, VCs get fairly chill even in a tough patch. They may not be excited about writing another check soon, but they don’t worry all that much. They’ve seen it before. And they want to believe. They want to believe their investment will rebound and do well. And you’ve given them enough reasons to do so. At least, if you aren’t running out of cash tomorrow.
But when they see fear, when they see a lack of market understanding, when they see founders that themselves don’t really know how to get back to growth … they check out.
That may or may not be OK. Just realize once, they do, it’s hard to get them to check back in.
A bit more here: