The S&P 500 — down 20.6 percent since the beginning of the year through June 30 — suffered its worst first half since 1970. That has wiped out $9 trillion in stock market wealth and slashed the prices that VC are willing to pay to own a stake in a private company — for example, Klarna’s valuation could be down 87 percent, noted Bloomberg.
Such drops in stock market valuations spooks VCs because they kill investors’ appetites for initial public offerings (IPOs). No IPOs means that VCs lose a key avenue for earning a profit on their risky startup bets.
What should business leaders do about it? For answers, I turned to Gordon Ritter, founder and general partner of Emergence Capital Partners, who made the Forbes’ Midas List four times.
in a June 2022 interview. Ritter — whose firm has backed successful companies such as Salesforce, Zoom Video, and Veeva Systems — shared five pieces of advice for today’s startups.
1. Resist the Fear of Missing Out (FOMO).
When FOMO runs rampant in the hearts of investors, they push their portfolio companies to grow to $100 million in revenue so they can go public before the IPO window slams shut.
CEOs struggle to resist that siren call because it urgently promises vast riches. As the FOMO bubble expands,”If a company grows from 1 to 3 or 4 in six month increments and doesn’t worry about taking risks, creating new products, [or finding a path to profitability]; it can get 100x annual recurring revenue valuations and raise its A, B, and C rounds all in one year,” Ritter told me.
When the FOMO bubble bursts such companies are at risk. To avoid that fate, Emergence encourages its portfolio companies not to push the pedal to the metal until they’ve built products that customers value more than competing ones.
2. Don’t grow fast until your product gives customers irresistible value.
As I wrote in Scaling Your Startup, business leaders should not seek triple digit growth until they complete the second stage of scaling — Building a Scalable Business Model.
Zoom Video followed this approach. As Ritter said, “As Eric Yuan, Zoom founder and CEO mentioned at our May 2022 CEO Summit, ‘Everyone told me I was crazy. The world did not need a new videoconferencing solution. One investor said he would write me a check for anything other than that.’ [Yuan] took about two years from 2009 to 2011/12 to rebuild Zoom’s code because he wanted to provide the best product in the industry.”
Are you such a leader? Ritter seeks out founders who [do not] “exhibit hubris. focus on the defensibility of their business, build a moat, and get their unit economics in line.”
3. Bolster your sales force.
During an economic downturn, customers look to spend less money on the goods and services they deem essential.
Here’s how business software customer behavior changes during a downturn. As Ritter explained, “During the FOMO part of the economic cycle, corporate end users are encouraged to use whatever software they like. When the bubble bursts, companies try to cut costs and make operations more efficient by spending only on the most essential software tools.”
If that is happening in your market, he advises you to strengthen your sales force so it can persuade what he calls “rational buyers” — such as a company’s chief technology officer (CTO) — that your startup’s product should be among the top three to five that the CTO will keep purchasing during the downturn.
4. Diversify your customer base.
If your customers are primarily small businesses, an economic downturn could make your revenue stream vulnerable.
How so? Silicon Valley startups that were backed by Y-Combinator, the famed startup accelerator, are encouraged to buy each others’ products to help spur their rapid growth, Ritter noted. When VC capital freezes up, those startups may stop buying.
To avoid that problem, Ritter urges startups to “go upmarket” — take the time to persuade large, profitable companies to buy their products.
5. Cut pet projects and focus on creating the future.
An economic downturn also should spur, business leaders to cut back on projects that won’t contribute meaningfully to customers’ success.
To that end, Ritter advises companies to eliminate R&D projects aimed at minor product modifications and invest in bold new products that customers will find most valuable.
Downturns can often result in more risk-taking than during a boom. As I wrote in April 2021, in the depths of the 2008 financial crisis. Todd McKinnon left Salesforce to start Okta, the identity management cloud service that is now a roughly $15 billion public company.
These five things can improve your company’s odds of surviving the downturn.