I’ve had a lot of conversations with founders about what to expect for valuations and why despite a lot of company progress, that they are still going to face headwinds. I found it helpful to explain to founders how investors think in the simplest terms Hopefully other founders find this helpful.
Founders: Think Like an Investor, Focus on Your Future.
It’s always incredibly tough being a founder, but right now is one of the most challenging times of the past two decades. The availability of capital (hint, there’s way less) and what is rewarded (efficiency over growth) has changed quickly.
As a founder, I know you’ve been in the weeds improving margins and trimming expenses. There is no question this is difficult, commendable, and crucial work and it’s given you a chance. But now you need to shift your attention to focus on your company’s future. Because – spoiler alert – your next round investor only cares about the future.
Beyond inquiries on TAM, customer feedback, and product demos the ultimate question every investor has to answer is: “With this amount of capital, can this company grow 3-4x to give me a 2-3x return on my investment before their next round?”
That’s it. That is the question. It doesn’t matter how much your burn multiple has decreased or if you executed a 30% RIF. The future matters and your future growth must be cash efficient enough to reach the next round.
And here’s the real kicker: your next round will most likely be 25-50% smaller than it would have been 18 months ago. So, that 3x-4x growth your future investors are looking for is going to have to happen with way less capital.
Here’s my advice. Take your operating plan, back up 6 months from your cash-out date, and play those metrics forward with a median check size for your appropriate stage. If you run out of money before you’ve grown 3x, your business still isn’t cash efficient enough – margins are too low, you have too many people, your return on ad spend is too low and takes too long.
Start over, rework the plan, understand what levers you can pull, and how much they need to change to achieve your bottom line. Push pricing, reduce the team to mission-critical roles, ruthlessly press on sales and marketing costs. Is it doable, or do you need more time?
If it’s doable, then quickly pivot to execution mode. Set your goals, explain them to your company, and run hard.
If it’s not, or it’s highly dependent on some unproven assumptions, build a plan for how much longer you need and how much bridge capital will be required. De-risk the most critical unknowns first and prove to your investors you deserve more time (and maybe a little more money).
There is no question that the founder journey is incredibly challenging. At Range, we know this from our first-hand experiences from day 1 to IPO. But the reality is that the hard work will continue because your future investors don’t care about what you’ve already done: they care about what you can do next.