Given this year’s changing venture capital climate, it’s not a stretch to imagine that we’re going to see a lot more of the following: down rounds disguised as extension rounds, recapitalization events conflated with secondary activity and vaguely defined references to growth, burn and other key startup metrics.
As the downturn threatens the ability of companies to meet growth targets, simultaneously emphasizing the need for them to get there faster while not losing too much money, we expect to see more creative math from founders.
We are somewhat accustomed to founders bigging up their wins and spinning their losses, but such sins can threaten to become whole-cloth heresies during a downturn. Of course, it’s not all out of malice. For decades, those within startup land have not been able to agree on a definition for recapitalization or, heck, even bootstrapping, because the terms in and of themselves are so vague.
Every few months, Tech Twitter wants to rethink how we name rounds, for example. But the terms are relative, and it’s the job of a journalist to get as close to the truth as possible (and push back when fluff is used as a replacement for truth).
In this column, Natasha Mascarenhas, Haje Jan Kamps and Alex Wilhelm talk through what the year’s data reporting could look like and what they are expecting to see or, perhaps more precisely, what they don’t want to see. The column is a companion piece of sorts to a recent Equity podcast debating the same topic. Check the pod, and then dive into the extended takes below!
Natasha Mascarenhas: Growth is subjective, sadly
It’s probably not surprising that I, a journalist, enjoy clarity from the companies that I speak with on a day-to-day basis. I’m talking specifics over generalizations, data over drama and proof that you’re growing versus promises that you are. As a result, whenever a startup shows an allergy to being put into a very clear box — as simple as having raised a Series A — it’s both a pet peeve and a question of inaccuracy.
Why? Growth is subjective, sadly, which means that oftentimes private companies (which are not required to share their financials publicly) can float a semblance of it without many repercussions. For example, a startup’s revenue may have grown 100% year over year, but that can either be from $1 to $2, thanks to its first customer, or $5 million to $10 million; who’s to say? Sometimes that example in and of itself can get a founder to tell me the true range of their growth, but it often means I need to place an asterisk next to any vague growth metric I include in stories.
Beyond a journalist pain point, vague math can confuse employees looking to join a startup during a great reset. Employees, especially those laid off over the past few weeks, should be set up for success when considering a new job opportunity, even if the market has shifted. So, while growth is subjective, that doesn’t mean that startups should view truth as a vulnerability they can’t recover from.
For example, two companies, Klarna and Instacart, cut their valuations in recent weeks. I doubt that these two industry-defining companies losing a portion of their value means that they are going to cease to exist; rather, I believe that these are examples of what corrections look like in real time. The more that we cover re-pricings, the more that the event itself appears to be less of a black swan event and more a reset of a company’s trajectory. In a perfect world, every company would be valued in a realistic, sane way that ties to their actual revenue. But because we all know that’s not true, we can’t be surprised when companies shed some multiples.
Reality checks are being tossed around quite heavily these days. Being open about your stance as a business would likely break through the noise (instead of getting you lost in it).
Haje Jan Kamps: There’s no shame in a down round
I get it — nobody loves a down round. We’d all much rather prefer it if every startup valuation graph went up and to the right. It’s good for employees, good for founders, good for investors and everyone can do a big happy group hug as we all make enough money to buy private jets and the infinite Kraft mac and cheese our little startup hearts so desire.
The reality, though, is that startups are, by their very nature, phenomenally unpredictable. Startups are looking, with varying degrees of desperation, for a repeatable business model. That means that the product needs to work, the sales/marketing engine needs to hum, and the company is successful in finding a product-market fit.
The ugly truth is that that’s hard. It’s really, brutally, impossibly hard to accomplish in the vacuum of only the decisions the company founders have control over — and that’s before external factors come knocking.
What if there’s a global financial downturn, a pandemic or a competitor suddenly appearing out of left field? What if the customer acquisition channels dry up or something else happens? What if you lose a couple of key employees or the technical solution you built takes longer than expected. Or, a major supplier disappears into thin air after being stealthily bought by a Big Tech firm, which then wants to shut down the external-facing products and use the technology to develop Siri internally? Forgive the very specific details; I’m not at all bitter over that specific thing happening to one of my previous startups.
What I’m saying is that every now and again, as a startup founder, things don’t go to plan. And occasionally, you’re faced with a choice: You raise money by any means available to you or the company hits the side of the mountain and the smoldering wreckage leaves very little left. “Any means available” might mean raising at a lower valuation than your previous round.
And you know what? Everyone that tells you you shouldn’t needs to go and sit in the sunshine and smoke a pipe for a few hours — as the CEO, your job is to keep the ship afloat. If a down round is the only way to make that happen, go for it. Raise the money, live to fight another day and let the naysayers say their nays until they turn purple in the face. The only surefire way for your company to fail is to run out of money; avoid that and everything could still turn out OK.
Alex Wilhelm: A good reminder that bullshit is bad for everyone
Putting aside my personal grievances at the imprecise reporting of performance data from private-market companies that I tend to receive, a lack of clarity is a generic bad. By this I mean that clear reporting of metrics — the good, the bad, the ugly — is not just good for the media and public understanding of a particular sector or market but also for the company in question itself.
Every startup has a different culture regarding sharing information with its staff. Some are more open, some less, and some are constrained by particular bits of regulation. (The last category we leave to one side, as it’s too nuanced a group to discuss in any useful capacity here.) But the other two, in my view, would always do better with more clarity in terms of data shared and transparency when it comes to definitions.
Bullshit is bad for everyone. Anytime a number is fudged, even slightly, it creates a false perception of reality. This means that everyone who hears that number proceeds into their work slightly off-kilter. This is true when it comes to internally reported and shared numbers — say, with employees and investors — and externally shared numbers. I have found it woefully common for at least externally reported startup numbers to be off by more than a rounding error. What are those companies saying internally?
Natasha rightly pointed out that a lack of clarity on corporate performance data, or a culture that discourages such questions, can impact employees. Struggling companies might have a hard time hiring if they were upfront about their lackluster growth data. Or if they had a higher-than-reasonable burn rate. So we can forgive founders for trying to talk their book to get folks to join anyway, right? I don’t think so. Potential employees might not have a financial safety net, meaning that they might not have anticipated that the company they joined was less secure than they were made to believe.
It’s generally accepted that venture investors are professionals who understand numbers. That’s mostly true. But employees — and, let’s be honest, most journalists — are not great at accounting and grokking the full weight of performance data. This makes those groups often easy to gently hoodwink into believing that things are great, even when they are not.
Bullshit comes in a number of forms, including the use of comparative metrics — percentage growth, for instance — that can make things appear rosier at a company than they truly are. If we are entering a period of creative math, it’s likely going to shine some startups that don’t deserve the sheen, leading to both poor employment and investment decisions.
Eventually, all bullshit gets called in startup land. No one can hold off reality forever. So there’s little point in leaning in to bullshit this year. Now is a time for truth-telling, both inside and outside of companies. And I would wager you lunch that the most transparent startups are those that also have the best internal cultures. Judge and apportion your time and capital, accordingly.
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