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By María Fernanda González and Nicolás Heeren
Over the past few months, we have seen a meaningful change in the VC landscape. Both public and private markets have reevaluated the multiples at which high-flying tech companies were valued at, which in turn has gradually translated into less capital being available to founders. As a result, startups have started to handle greater market and organizational complexity now that the financing dynamics have been adjusted.
Even though it may seem like we’re headed towards impending doom based on the market pullbacks and recent layoffs observed, there is also a great opportunity for founders to reevaluate course of action and to thrive during uncertain times. At ALLVP we believe that, in the long-run, technology will still be the most important driver for progress throughout Latin America. This means that what we’re going through is just another challenge for founders to navigate through, and we want to make sure that we do our part to help them do just that.
From where we stand, we believe that the most important thing for startups to do at this moment is to ensure survival. There are better times ahead, but to enjoy them, founders must be disciplined in order to make it through to the other side.
Taking this into account, we’ve developed a framework to help startups make strategic decisions on how to react to this challenging environment. The two key drivers we believe will determine the fate of most startups are (1) expected runway, which is the amount of cash the company has in the bank divided by its monthly cash burn and (2) the startups growth rate.
Focus: The startups that are best poised to take advantage of this downturn have healthy growth rates and an expected runway of over twenty-four months. These startups have a cash buffer that allows them to continue focusing on their operations without having to worry about potential liquidity issues for a long period of time.
Recommendation: These startups should stay focused on their core business, with an added emphasis on efficient growth, revenue predictability and profitability, as these are the metrics markets will value for the foreseeable future.
Pivot: Startups that have an expected runway of over twenty-four months but are having trouble growing will be less affected by this downturn, as their core concern is not finding capital to grow, but ensuring that they have product-market fit. These are likely to be cost-conscious companies that are still experimenting with their product.
Recommendation: These startups should double down on finding a new product-market fit to ensure that, once they have it, they still have the runway to fuel growth before looking to raise additional capital. It is advisable to avoid hiring too fast or overspending on marketing.
Extend Runway: Startups that are growing quickly but don’t have an expected runway of over twenty-four months have tough decisions to make. Part of their growth likely comes from heavy spending on product development and customer acquisition, and reducing costs will probably lead to a slowdown in growth. We believe that this represents the bulk of the successful startups in the region.
Recommendation: These startups should focus on improving financial and operational discipline and reducing unnecessary costs in order to become more efficient. Most should also have to raise round extensions with attractive terms to investors in order to weather out the storm. We recommend founders to pay close attention to their negotiating leverage in upcoming rounds and the impact it has on their dilution.
Reevaluate: The startups that will have the hardest time are those that have a limited runway and not enough time to nail their business model. As these companies are not growing at the rate markets would expect, they will have a very tough time raising additional capital now that investors have become more risk-averse.
Recommendation: These startups should take a step back and consider all available options. The main goal is to go lean in their operations and boost growth using the least amount of cash possible in order to be able to fundraise and keep the business alive.
We hope that this framework can help you make strategic decisions that ensure the short-term survival and long-term health of your companies. Despite the current state of the market, we’re confident that Latin American tech startups will continue to enhance life and solve problems across the region. If anything, we believe that the tough times we’re going through will make them even more resilient.
It may not be easy, and you will have to make tough decisions, but we strongly believe that if anyone can do it, it’s Latin American entrepreneurs. Moreover, the first phase of the pandemic showed that action, opportunity and survival are all linked. You’ve got this.
(Main image: Adobe Stock)