I sent this e-mail to our founders on May 16, 2022 in light of public market volatility and the corresponding VC twitter prognosticating. By popular request, I’m sharing more broadly in hopes it may prove helpful to others navigating these same waters.
Gutter Capital Founders,
There is a lot of bad advice going around on Twitter, so I wanted to share some thoughts. Less on what is happening in the market, and more on what to do about it.
By now you have heard the doomsaying. Winter is either coming, or it is here. I am not an expert in macroeconomics or geopolitics. I don’t know when inflation will fall, or what Russia’s ambitions are beyond the Donbas. I can’t say what the median price of a Series A will be a week from now or a year from now, but I can tell you with a high degree of certainty the deals will get done. This is not the dot com bubble bursting. Software isn’t going anywhere.
The relevant question is will your deal get done, and at what price. Given the young age and healthy cash balances of your businesses, the decisions that will determine the answer to those questions lie ahead of you. In fact, so do the majority of the decisions you will make in business. Don’t squander this incredible gift. Turning a rowboat is easier than turning a cruise ship.
Panicking is not productive, but neither is carrying on business as usual. It is important to remember that most of us have only ever known a secular boom in tech — a thirteen year bull market, followed by a pandemic, followed by skyrocketing valuations, and now this.
Now is the time to set yourself and your business up for success in the uncertain year that lies ahead of us. The advice is evergreen, but that is the point. You will never control the macro environment, but you will always control the caliber of your own execution. The environment is changing, but we are all sailing the same sea. Difficult business environments punish sloppy execution, and reward disciplined operations. In which boat do you plan to be?
Be explicit about your goals, and your plan to achieve them.
At the seed stage, your goal is most likely to mature the business to be prepared to raise a Series A, otherwise the business is dead. In practice “series A readiness” is an amuse-bouche of metrics (revenue, growth rate, margin, NPS etc) that says your business has demonstrated product-market-fit, and is ready to ingest more capital efficiently to scale geometrically.
If you have not already, now is the time to get explicit buy-in from all of your investors (including me) on what these metrics need to look like for your business to raise the next round of financing. It is important to get lots of points of view because nobody has a crystal ball. It is also important to own your own point of view. It is your business.
You should also take the time to meet with investors who might lead your next round and get their feedback on these numbers as well. You want to avoid a scenario where you think you have succeeded, but investors think you have failed. You want to get downstream investors excited about your plan and invested in your business before you need them for capital.
Once you have clarity on where you need to be to raise more capital, work with your management team to develop a plan that bridges you from today to the goal, charting all key metrics in monthly increments. It is critical that your management team is bought-in. There is nothing more dangerous than presenting a plan to investors your management team doesn’t believe is possible. If you can’t get to the milestones with a ~3 month margin of safety, we need to talk ASAP about how you might extend runway.
Evaluate your team with new eyes.
There are two important questions to ask here about every single member of your team. Are they necessary? Are they excellent?
First, are they necessary? Generally speaking, prior to a Series A there is no need for administrative or support personnel. All team members should either be focused on building the product or selling it. The obvious benefit to minimizing headcount is payroll, the less obvious but more significant benefit is distraction. There will come a time when HR and Finance have valuable opinions on the business, not typically pre-Series A. Spend that time talking to customers.
Team members can be rehired, companies can seldom be resuscitated if they run out of cash. I have never enjoyed firing anyone, but I have never regretted it either. Move decisively and compassionately and your team will respect the decisions you have to make.
Second, are they excellent? If you wouldn’t hire someone today, you should fire them ASAP. The past few years have been a challenging environment to recruit in, that may change. The layoffs have begun, if they continue the market for tech talent will soften. Don’t waste the opportunity to revisit your talent bar on your team. People who you could not afford or could not recruit may now be within reach.
Scott Belsky has said that getting it right is often a matter of keeping the band together long enough to figure it out. I agree. Make sure that every member of your team is committed to each other, your mission, and willing to leave it all on the field.
Focus on unit economic efficiency.
The era of “growth at all costs” is dead. Good riddance. It is not a good way to build a business. Trust me.
The layoffs happening now are a reflection of this paradigm shift rippling through later stage companies who built their organizations under the influence of a market that no longer exists. You have the benefit of starting from basically zero with a compulsive focus on unit economic efficiency.
You cannot overpay to acquire customers. You cannot service customers unprofitably. You must do everything in your power to retain your best customers and convince them to grow their business with you over time.
If you cannot grow profitably, you should not grow at all. This can be a painful exercise. It may require jettisoning aspects of the business to which you are attached. It is important to remember that you can do everything you want in the fullness of time, but you cannot do it all at once.
Delight your customers.
At the end of the day your customer’s experience is the only thing that will determine your fate. Give your customers a product and level of service that they can’t help but to talk about. The best thing you can do for your unit economics is to serve your customers so well that they refer others, spend more, and stick around. Solve for this.
It is likely that your customers will be tightening their belts too. When they prioritize spending on essential products and services, you need to be on that list. What will they say about your product when your name is on the chopping block? What will they say about you? Invest the time and energy today to deepen relationships with your best customers and partners, so when the ball is on the net you increase the odds it will land in your favor.
Over-communicate to investors.
Now more than ever, you must maintain a regular cadence of communication with your investors about what is working and not working in your business. Regular communications will build your reputation as an effective manager: someone who consistently does the things they say they’re going to do and can be relied on to identify, diagnose, and solve problems as they arise. Don’t sugar coat the issues in the business, your investors have seen worse. When you do, you are only eroding trust.
As with your customers, now is the time to deepen relationships with your investors so that if it may come time to circle the wagons and raise a bridge financing, they will be willing to stake not only their capital but their reputation on you and your company. Treat your investors like partners and they will show up like partners. Keep them out, and they may not show up at all.
Define your culture, and live it.
How would the last person to join your company describe your culture? How would you? When you fail to define your company culture, others will define it for you. That usually doesn’t end well.
A strong culture will amplify your success when times are good and fortify you when things are hard. You can’t wait to define your culture, you must start today. There is no meaningful company without a meaningful culture.
Company culture is not witchcraft, it is mostly operations. Culture is “a thousand things a thousand times”. Defining your values is the easy part. The hard part is to weave them into your daily operations — how you recruit, set goals, manage performance, celebrate wins, compensate, promote, etc. It is not hard, but it is work. It’s not what you say, it is what you do. Your culture must animate the actions of your team every day.
Building culture is made harder by remote and hybrid work. If you have the opportunity to work together in an office, do it. Building a startup is hard, you do not need to make it harder by being a pioneer of the future of work. This is especially true when you are first forming a culture and working towards product-market fit.
It’s time to lift the weight.
I am not asking you to do anything that I have not done before. I know that doesn’t make it any easier. From my experience, it only gets harder with time. The longer you wait the more expensive and painful changing course becomes. Trust me. I got lucky that we avoided catastrophe and were able to exit Managed by Q when we did. I fear that this market will not be nearly as forgiving.
James and I are deeply committed to each of you and remain enthusiastic about the businesses you are building and the critical missions you chose. It is your responsibility to evaluate your plans in the face of new information, and your opportunity to do the things today that you won’t regret regardless of what tomorrow brings. This is not panicking, this is operating.
In the words of Ronnie Coleman, “everybody wanna be a bodybuilder, but then nobody wanna lift no heavy ass weight.” Well friends, it’s time to lift the weight. We are here with you every step of the way. The best is yet to come.
Gutter Capital is an early stage venture capital firm based in New York City. We back mission driven founders building software-driven businesses with a focus on affordability, economic mobility, and sustainability.
If you’re building something we’d love to hear from you at firstname.lastname@example.org