AirTree says startups need to have enough funds to last two years

Startups should ditch the ‘growth at all costs’ mentality and focus on conserving whatever capital they have to survive, big VC firms have advised.

Mike Carden, the founder of enterprise tech company Joyous, and AirTree partner Elicia McDonald. Picture: John Feder

Venture capital firms have new advice for start-ups: ditch the “growth at all costs” mentality and start looking at ways to extend your capital runway.

The advice comes as investors are increasingly cautious with the money they pour into businesses only just taking off. The market has seen a dramatic shift over the past half year, as tech stocks continue to plummet and the US market evaluations affect other players.

The labour shortage, which was once driving salaries up and up, is no longer the main concern as start-ups look to cut costs. And the VC firms that fund them are now advising anyone looking to raise capital that enough funds to last six to 12 months won’t cut it, and that companies should aim for two years’ funding instead.

That was just one of the messages delivered last week at a meeting at VC firm AirTree’s Sydney office. Partners had called the companies they had invested in to talk about the current market and the methods of survival for the foreseeable future.

About 50 people attended the meeting, with Mike Carden, founder of New Zealand-based enterprise software company Joyous, among them.

“One thing, which I really believe, and we probably started doing this four months ago, is really asking how do you get break-even optionality because that will deliver the most shareholder value at the moment,” he said.

“It’s funny that when people talk about breaking even they talk about it from the perspective of cutting opex (operational expenditure), but actually the way you do it is by trying to grow revenue faster, and you’ve got to try to do it in more capital-­efficient ways.”

Mr Carden said Joyous was more fortunate than most largely due to a $15m capital raise in August last year.

“If we had not raised capital last year, we’d of course be in a very different position right now,” he said.

AirTree managing partner Elicia McDonald said while early-stage investment was still available, later-stage raises may not be as forthcoming.

“Put simply, growth-stage companies are now looking to ­actively extend the capital that they already have versus going back to the market,” she said. “Most founders are looking for minimum 18-month runway, 18-24 months, just to get through this period of uncertainty.”

In the US, the picture was darker again, with many start-ups being told to raise enough funds for up to five years, said Galileo founder James Alexander.

“It’s a lot worse … so far I’m hearing investors over here saying you need three to five years runway to survive what’s going to happen next,” he said.

Of the Australian market, Mr Alexander said he was slightly more optimistic, but he advised against raising capital unless absolutely necessary.

“What we’re telling our founders is that in the early stage when you don’t have a business model, find a way to sustainability as fast as possible,” he said. “If you’re out there fundraising now, and we have a few doing so because they have to … if you have to raise, then go for it. If you don’t have to, wait it out to the end of next year ideally and you might get better terms.”

In the current environment, it was the investors who had all the cards. “What was once a founders market is now very much an investors market,” he said. “A lot of investors are using the excuse of the downturn as a way to get better pricing. That’s kind of expected because we went crazy last year in the growth stage.”

At Telstra Ventures, “the advice that we’re giving our portfolio companies is that cash is king,” managing partner Matthew Koertge said.

While some had a strong appetite for risk, Mr Koertge said he would not be as brave. “Some are still happy to run the cash down to zero … I am a lot more conservative and would recommend having more than 12 months if possible,” he said.

Over the last few quarters, Telstra Ventures had shifted its focus to the cash burn rate. “The key reason is we just don’t know what is going to happen. Venture funding rounds have slowed down a lot,” he said.

Matthew Koertge of Telstra Ventures.

TEN13 partner Stew Glynn.

Stew Glynn, managing partner of TEN13, said his investment firm had closed in on about 200 extra investors over the past six months and, despite the increase, the amount of capital invested remained the same.

“I think it’s fair to say that the capital markets have slowed down and reduced and it’s probably healthy reset,” Mr Glynn said.

“(Investors are) more focused on some of the fundamentals from an investment perspective (and we are) seeing that flow through on their invested capital numbers.”

While capital has shrunk, more companies were now presenting to TEN13 seeking opportunities. “We saw 135 companies last month. That figure is up as we usually only see between 1000 and 1200 per year,” Mr Glynn said.