Winter Is Coming For Startups

The days of tech companies raising millions of dollars and burning through it for the sake of growth are coming to an end.

Last night, I listened to the All In Podcast, which is hosted by some of the world’s top tech investors, such as Chamath and Jason Calacanis. The first 30 minutes should have all startup founders very worried. Here’s what they said. 

The Breakdown

When interest rates went down to almost zero at the beginning of the pandemic, venture capitalists could get their hands on large pools of money for a historically low-interest rate.

Over the past two years, they have been deploying that capital as quickly as they could get their hands on it.

This worked great because everything seemed to go up, and investing in startups valued at 10x or 20x their revenues made sense.

But now? With interest rates at an all-time and looming depression, venture capitalists are out of money to deploy. 

Chamath stated that the cost of capital for VC investors is now sitting at 14% for April 2022.

That’s a huge increase. This means VCs are out of money and will only focus on the top-performing startups to make it worth it to them to borrow a 14% annual loan to invest.

What does this mean for startups?

Valuations are going down.

With less velocity of cash in the ecosystem, valuation multiples will decrease.

Down rounds.

The companies that are good enough to raise money will experience raising rounds at lower multiples, which means less equity for founders.

Startups will die.

Investors are looking for companies that at the very least double each year, so if your startup is growing a respectable 30% annual, you could be out of luck if you don’t have cash.

What Should Startups Do?

Focus on cash in the bank.

The All In Podcast hosts recommended having two years of runway cash in the bank to weather the startup winter and recession.

Close deals now.

If you are currently working on a deal, now is the time to get it across the finish line. Terms will undoubtedly be worse a few months from now.

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