Steve Blank joins Nick on a special Crisis Coverage installment to discuss The Playbook for Startup Survival. In this episode, we cover:
- What industries will be most affected by social isolation?
- How do you see this playing out over the next 3 – 6 months?
- How does this pandemic and the impact on the economy compare to the past 3 market crashes? Similarities/differences?
- Having lived through 3 crashes, what’s the biggest mistake CEOs make?
- So lets say I’m a startup founder — What are the major questions I should be asking before putting a new strategy together?
- Let’s talk about burn and runway — can you break down the key elements and how much runway one should plan for?
- What are the first cost cutting measures that should be taken?
- Should startups consider a change in business model, go-to-market or even target customer — why or why not?
- Do you have any guiding principles when it comes to communication — whether it be to employees, customers or investors?
- What happened to startup fundraising at different stages (seed, A, B, C) in the last crisis of 2008?
- You’ve stated that the health of the venture business may depend on what hedge funds, investment banks, private equity firms, sovereign wealth funds and large secondary market groups do. What are the possible and likely scenarios in your estimation?
- What advice do you have for those companies that have limited runway (3 months or less)?
- How about advice for pre-funded startups that are just getting off the ground?
- Steve’s Twitter
- Steve’s LinkedIn
- Steve’s Website
- The Virus Survival Strategy for Your Startup
- The Four Steps to The Epiphany
- The Startup Owner’s Manual
Transcribed with AI:
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet.
Hello, everyone. Over the past week I’ve received more calls from VCs founders and LPS than I have in the past quarter. Everyone’s concerned about the crisis and many are looking for guidance. The reality is I have not gone through a crisis as a VC. And while I have a number of ideas as to how best to adapt and weather the storm, there are others that have seen many downturns and learn critical lessons. While spending most of my time on the phone over the past week, I’m also getting a flood of emails from listeners, it’s clear that we are all searching for authoritative advice and perspective now more than ever, in light of that we’re kicking off a new series here at TFR. I’ll be connecting with three or more folks every week that have experience and expertise on how this crisis affects specific areas within venture. We’ll discuss a range of topics like how startups can create a lifeboat strategy, how emerging fund managers should adapt how the LP community will change their investment strategy, how best to manage cash through this crisis, and many, many more, it won’t be as polished and we won’t do any editing, you’re just gonna get the raw candid discussions that I’m having with the industry’s best. So over the coming weeks, we’ve got an all star lineup of guests on the schedule. It’s important to not just get any advice, but to get advice from the best minds in our space, especially at this critical time. My personal feeling is that startups should not just survive this crisis, but should figure out how to thrive through it and beyond. We kick off today with one of the best discussing how founders need to adjust and save their companies as this unfolds. Here’s the first interview in our crisis coverage with the founding father of the lean startup movement, Steve Blank.
Steve Blank is back on the program. Steve is a professor at Stanford and Columbia. He’s co founded eight startups, author of The Four Steps to the Epiphany and the startup owners manual. He works closely with the NSF to commercialize science and applied research. And most of us know him as the founding father of the lean startup movement. Steve, it’s been over five years since we had you on the program. You know, I wish it were under better circumstances. But nonetheless, welcome back.
Well, thanks for having me. Yeah. It’s a it seems like yesterday. But I’m sorry, we have to have a podcast and a week like this.
Agreed? Agreed? Well, you know, first, I wish the best of health and safety to you and your loved ones. But today, you know, we’re here to talk about the founder side of things and how to help those startup CEOs. Steve, you’ve published some really great content on how to kind of adjust and adapt strategy as the crisis unfolds. I’d love to dig in there. But before we do, so, let’s take a step back and kind of discuss, I guess, the effects of the quarantine the shelter in place and in the social isolation, you know, on on the economy, but maybe first a good place to start would be, you know, what are some of the industries that you see most affected by by the social isolation?
Well, I think the obvious ones are the ones that people are just reading and seeing about in the news, you know, travel hospitality restaurants, in any place with fixed costs that relies on foot traffic, you know, all of those are dead or dying with shelter in place. The not obvious ones are with millions of people out of work in the next few weeks. You know, discretionary purchases, like furniture fashion, lifestyle will take a hit advertising is going to take a hit. Even other businesses like law firms, contracting firms, real estate firms will take a hits as well, it’s the ripple effects won’t be obvious at first. But you know, for most businesses, the primary thing you need to think about is your customers who are no longer be your customers and your revenue plans, you’re no longer valid. And so you need to rapidly assess your internal and external environments going forward. And I mean, rapidly.
How do you see things playing out over the next three to six months?
Well, I think everybody from the President on down are trying to figure that out. You know, that we could either look like China and control this thing and be back to work in three months, or we could look like Italy, where there’s no end in sight. I think there really depends on everybody in the country. Just simply breaking the, you know the chain of infection by staying at home We’re isolating from each other. But you know, we’re making a conscious decision to greater economy to save potentially hundreds of 1000s or in an extreme million lives. And that’s a tough trade off. No one’s ever had to do that before.
So, you know, I haven’t seen a crisis quite like this one. And in my lifetime, of course, I know that we’ve had a number of market crises in the past. And, you know, you’ve experienced some of those in various business capacities, you know, how do you think this pandemic, in the impact it’s having on the economy compares with maybe the previous market crashes that you’ve experienced?
Yeah, I think people are a little confused as the other market crashes. You know, the ones I went through in 87, and 2000 2008 have some underlying flaws in the market or, you know, when the.com bubble burst, it was because it was a tulip mania when the 2008 crash happened, it was a housing mania. But this is the inverse, it’s the market is reacting to a real pandemic, not of a fundamental problem in the economy. But but something we’ve decided that we’re going to do to, to save, as you said, lots of lives. So structurally, it’s quite different. The problem is, is that when we do this, we’re going to create a at least double digit unemployment, which will ripple through effects for everybody who’s listening. It potentially, potentially, it could be as bad as that the crash of 87 or 2000, to the depression of 2939. If we don’t get this under control,
do you think that there are some fundamental issues as well, and that the pandemic is more of a catalyst?
Well, I, you know, we’ve been talking about living in the bubble economy for the last, you know, 10 years. And, you know, we had a great run since the recovery out of the crash of 2008. You know, there was a question already with Softbank, and we work etc. Have we reached the top of a frothy bubble? I think that just piled on to the existing problems. But if you’re a startup or startup investor, you know, values that you had, you know, the first of March are no longer the values you have in your companies or in your in your portfolio. And first of April, that’s pretty clear. And for companies that were cashflow, negative, or teetering on cashflow, negative, this changes everything. You know, the most fundamental questions, startups and their investors need to be asking is, you know, what’s my burn rate? What’s my runway? And, you know, what’s my gross burn rate? How much cash Are you spending each month? And how much are fixed expenses? You can’t change? And how much are variable expenses? And do you have any revenue? And if you do, then, you know, then you could calculate your net burn rate. Or if you’re an early stage company, revenue is zero. So your prograde your gross and net burn rate are the same. And then you want to just figure out, How much money do you have in the bank and take that burn rate and calculate how many days you have left to survive? That’s your your runway. And, and what’s going to be interesting is, if you’re a startup and you were expecting that your runway was predicated on getting a next round, at the end of or before that runway runs out, I’ll contend that all bets are off, because not only does startups need to reevaluate their burn rate and cash flow and priorities and and what I call their life post strategy, but investors are going to be doing the same. If everybody’s strategies are going to be different, as I said, the, from the first of March the first April, you can’t have the same plan.
How much do you think these companies should plan for you know, what’s a runway target that feels safe?
Well, you know, if if you were a CFO, you’d say, you know, if you have 24 months of runway in the bank, and you’re doing great, but most startups typically don’t have that. And in fact companies who thought they had that the last week probably don’t have that at all if they start talking to customers and finding out that those orders they thought they had really aren’t orders anymore. Yeah. So you know, I kind of suggest that companies Think about, you know, a very rapid assessment of what’s going on. In fact, if you really think about it a company survival in this downturn could be captured in a pretty simple formula. And that formula is as follows the survival of your company, equals number one, the speed of your understanding of the situation, times the magnitude of the pivots, cuts and lifeboat choices you’re gonna make times the speed of the time you take to make those decisions and make those changes. Those are the three things that matter, you know, speed of understanding, the magnitude and size of the changes you’re gonna make, and how long it takes you to make those changes. Yeah. And, and that’s kind of hard for people to do, particularly in existing companies, where the founders are no longer in place, and you have CEOs were there for scale and growth and have built processes and procedures. You know, this is not the time for consensus and long meetings and committees and whatever. You need to very quickly assess both the internal and external environments. And I mentioned to the things you need to assess your burn rate, and your runway, but you really need to, you know, kind of like, sit down and with your sea level staff and figure out how much cash you have, what do we need to do to stay alive? And to answer your question, what’s our assessment for the next five quarters of the state of the economy? What do we think the unemployment rate is going to be? Well, Shelter in Place still be around? And again, there is no right answer, but you have to pick what your planning criteria are. And then then number two is, you know, what’s the healthy your current target markets? Are they still actively buying? Because you’re still selling stuff to Walmart? or Amazon or grocery stores? Are they not returning calls? Or were they restaurants who are all out of business? And then three is, you know, are there new markets that are emerging? You know, telemedicine, you know, online training? And when do you think workers are going to return and your customers? That’s an external assessment? And the internal assessment is very quickly? What are your operating numbers? What’s your liquidity? What’s the likely date you run out of cash and your worst case scenario? What’s your accounts receivable and payable look like? What’s your sales pipeline look like? What are you spending on marketing programs, most importantly, what’s your payroll costs and other variable costs, and then other additional sources of capital, that you could tap either debt or loans or, you know, no, investors want to belly up at a down round, but you might want to take the cash. This first assessment needs to happen, like within a day or two, and it’s not something CEOs get to outsource to their staff, and need to set up a war room and work with the CFO. And, and until that’s done. And this is going to start to get your team aligned about the size of the problem your company has, specifically in this case, I suggest is, I don’t really give a whatever what your VP of sales is saying about forecasts because they will tell you things are great until like the day they’re not, you need to get on the phone with your top 10 customers, or potential customers in the pipeline, and find out whether they’re still in business, you know, then you’ll have your hands on a real forecast. And the CFO should be on the phone to get to at least understand are there additional sources of capital? Including, you know, can you offer existing customers, you know, huge discounts to get early cash in the bank? Now? Yeah. And then you want to have to take that assessment you’ve made and talk to your board, here’s what we think, here’s what we think the economy’s gonna be look like, here’s how soft or hard our orders are. And this is what we see outside. Do you guys agree? Now, what’s really interesting is that, you know, boards have multiple companies in their portfolio. And so they have maybe a bigger horizon that they’re looking at, and you could get some great feedback from board seeing the same assessment for multiple companies. And, you know, you might disagree with your board about they might say, oh, things are just fine, don’t worry, et cetera, where you’re finding out? No, we feel like the roadrunner who just kind of ran off the cliff and there’s no air underneath us. No, this is one of the major career decisions you’re going to be making an extra month or so about, you know, go along with advice you think will damage or destroy the company, or put your job on the line. You know, a year from now, no one wants to be the CEO of a company out of business. Who said well, I did what the board told me And if I could, if I could keep going?
Well, it’s I mean, part of the reason we reached out to you and some of the other folks that we have on the schedule now is because there’s just there’s a lot of advice givers out there, and a lot of mentors, and I think everyone needs to be selective with, you know, who they speak with, and who they listen to and, and craft, you know, a custom strategy for their business. There is no one size fits all here. But, you know, it’s something that you’ve called attention to multiple times, whether it’s in your survival formula, or, you know, in the reaction in general is speed. And, yes, I mean, that’s something that’s critical mission critical for any startup, regardless of the situation. But it’s even more critical now, like, in this environment, if if you’re not quickly understanding the situation and how it affects you and implementing countermeasures. It’s, it’s gonna get worse before it gets better. Right.
And I couldn’t agree more. And, you know, the first step was assessments, and that’s what I’ve just been talking about. And you need to do that, literally within a day or two. But the real hard work, is once you’ve got your board, and you aligned about what you think the world is going to look like, it’s to plan and prepare major changes. And by major changes, you know, that’s three parts, pivots, to your business model, changes to your operating plan, and what kind of initiatives might you want to save on a lifeboat when the economy does recover? You know, but pivots the business model. What I mean is, are there new customers, new services, new channels to pursue? Which parts of your business model can now serve the new normal? You know, is it remote work, social cohesion, maybe you have great logistics, or warehouses, you can actually sell to other people who need those resources, while the rest of your business might not be going great. You know, if you had brick and mortar locations, can you pivot to e commerce? I have to tell you, I was just on the phone into a couple of early stage companies. And even founders have a hard time doing this part. And it was one was a kind of an app for clinicians, doctors and hospitals. And they were basically automating the standard drug and directions for for doctors, and I just kind of was like appalled, and maybe surprised, appalled, that they weren’t on the COVID-19, you know, like, database? Like, how come you’re not like just pivoting? for them? It was only about 10 degrees. And they went Oh, yeah, we were so focused on our current business model. Another example was a company doing onboarding for, you know, large corporations via slack and social media. Well, most companies aren’t going to be doing much onboarding, they’re going to be doing layoffs, but they do have issues of how do you kind of maintain social cohesiveness for remote workers and and kind of, have a company still feel like a company when they’re working remotely? Well, that same app could have been pivoted and is being pivoted now within a week into something that takes the same core technology, but just changes its positioning and, you know, a little bit of the user interface to focus on remote workers. So it’s possible to kind of reach them for a good number of companies to rethink about how does the new normal fit into your product line. And the new normal is remote work, you know, like telemedicine. There’s a whole series of things that are kind of now driving a new set of demands. And the second part of this, besides thinking about the new parts of your business model, this changes to your operating plan. And if your cashflow, negative, or going to go cashflow negative, you need very quickly and I mean, within two or three days to figure out what cuts do you make to spending programs, Marketing Service manufacturing r&d? What are the lifeboat choices, what layoffs do you make? How do you renegotiate payables? How do you read and negotiate what used to be fixed expenses that you didn’t think you could renegotiate like rents leases, and how do you trade off cash management versus revenue growth? The other things to think about is your head of HR, which on Monday was worried about employee job satisfaction, your head of HR is not going to be worrying about layoffs. That’s a really different role. And, you know, your corporate culture is going to change. It’s particularly for young startups where you have this consensus and we’re all you know, like, gee, we need to make everybody feel happy. You know, no, out, you need to remind people, they’re all working to save their own lives and their own jobs. So you need to prepare a new business model and operating plan. Whereas in the assessment step, you want them to just get your C level engaged. Here, it’s really important to kind of open up suggestions from the entire company. Because your employees likely have ideas and see opportunities that may not be visible in the C suite. And that’s going to also signal to everybody that now’s the time for all hands on deck. And it’s also going to signal that we’re going to be making decisions quickly to separate the crucial from the irrelevant. At the same time, companies need to communicate and communicate and communicate more about why they’re doing this and why you’re asking for ideas. And I kind of suggested daily update from the C suite. Let people know what you’re learning. And then when you begin implementing changes, you know, tell them why. And again, you you take all this stuff, and you iterate with your investors and your board. But this stuff needs to be done within a week, not a month, not committees, not whatever, because it can’t be you have the same business model, this week that you had at the beginning of the month, just not possible. And then finally, and I’ll just stop babbling is the third piece is you need to start implementing these changes now. And And again, if you were not a cashflow positive company, the biggest changes are going to be changes in layoffs and culture. And every downturn I’ve lived through there were CEOs who handed handled layoffs is what I call it death by 1000 cuts. You know, they, if they had 100 employees, they lay off 10. Then a month later, they lay off another 10 And then another 10. And what if rather than being productive, it was demoralizing and paralyze the remaining workforce, because everybody was looking over their shoulder, worried, you know, am I going to be the one who’s laid off next. I’ve seen other CEOs kind of get it right by immediately laying off 40 people and having 60 left. And, you know, if they overshot, they could hire 10 back. And while mass layoffs kind of create some immediate shock, people begin to feel a lot more secure, because this isn’t going on every week. At the same time, you know, you need to be communicating, as I said, on a daily basis to your company, about the business model and operating plan changes. And you need to offer relentless optimism for survival. But let people know that you’re going to be micromanaging and expect each one of them to do the same. So that’s it, I think there are, as I said, three steps, assessment of changes in business model and operating plan. And, and then just implement rapidly. And when I talk about this stuff, I mean, like within a week, and unless you’re on some other planet, I don’t think this is going to get better for the next three months. That is we might change some of the rules about shelter in place. But I’m afraid given who we are as a as a nation and our inability to lock down the country, we’re going to look a lot more like unfortunately like Italy than than China.
So I mean, is this guidance primarily for startups that are in cashflow negative situation on a monthly basis? Because I do know or well
being? Or will be? Or will be? Because there are there
are a range of effects here, right. Like the majority of startups that I’ve connected with are going to suffer, they’re going to be losers because of the situation. But there are a handful that are in a strong position to sort of thrive amidst this situation. So there’s
a there’s a bunch of categories that will that will thrive. And I want to make clear, you know, there there’s, I’ll put them in two buckets. One, which who were already in the successful categories, which I’ll describe, and the others, which are companies that as I think I gave you a couple examples should be pivoting to successful categories, if they can. So, obviously, you know, the companies and businesses, any any online programs, you know, I teach at Stanford and Columbia and we basically have been both both schools of said next semester and quarter is going to be completely online and just replicate that across colleges, universities, you know, K through 12 Any online ordering stuff is, is going to thrive. Obviously the food delivery ecosystem will thrive. You know, we’re we’re seeing, you know, people just can’t even keep up with the demand that telemedicine is not is not only here to stay, but one of the side effects of this, of this crisis is the FDA has just changed a whole set of rules about allowing doctors to do telemedicine across states. And these restrictions are being lifted. Because of the pandemic. You know, at home fitness options, you know, boy, you wish you own a peloton right now or something equivalent, right? You know, it’s going to change the nature of media, you know, Disney and others are now releasing movies, just online, before they’re going to hit the theaters, because there are no theaters, or at least most most states are closing down their theaters. Well, that that was like a food fight for the last 20 years. With theater chains, it’s hard to see that’s going to ever go back again. And so there are a set of categories, as I said, logistics, you know, supply chain, etc. A lot of its going to get hammered, but a lot of it’s going to be reconfigured. So if you could take advantage of one is this new normal? And in fact, will people actually start doing more online ordering, will they start doing more online education, because there will be a morning after that is we will have a recovery? The question is how much of this stuff will kind of change your behaviors and our patterns of of work? And if I was a startup, those are the things I’d be looking at.
So how does one avoid reacting, overreacting and adjusting, you know, with with the wrong strategy, right, like I believe last time we had you on the program, you and I talked about how you can go to customers, you can talk to customers, and you can use the customers as sort of a guiding, guiding force to help you find the right direction to go. Right. But in this situation, there’s many customers that are running around and scrambling and they’re doing their own damage control and crisis assessment and don’t know which way is up. Right. So there’s there’s some general principles, I think, that are obvious coming out of this. But how does one How does the CEO avoid overreacting and losing its vision or mission or more sort of guiding principles of Mr. Crisis?
Yeah, so you know, it’s a great question. And I’m struggling with with a short answer, and I’m not sure I have one. You know, no one’s ever regretted. Cutting burn rate in a crisis. Almost every person I’ve talked to including me, who’s lived through most of these crises, when you ask them what they regret, it’s not acting soon enough period, and the discussion. You can always hire people back. But you can’t hire back your burn rate once that cash is gone. If you don’t get it back. Does that make sense at all? Yeah. So if I had an error, I’d be err, not in panic. But that’s why I said, number one, assess number two come up with a strategy of business model and operating plan and a lifeboat strategy. And number three is act. So it’s not just randomly, let’s lay off half the company. It’s actually the think through what’s the plan? And is there an and engage the entire company is, is there an opportunity here we just didn’t see that actually might make us bigger and stronger. And the last part is, and smart companies in a crisis in a downturn do this all the time, is what’s the one program we wished we would have kept, or at least would have kept, you know, a small version of it, that when the recovery does come, that will allow us to grow faster than our competitors. So it’s not just kill everything. It’s just make sure that that the things we downsize are the ones that we could just hire back again. Does that make sense?
It does. Let’s say I’m a CEO and I’ve got less than five months of runway. Is that the guidance different for folks in that situation? You and I both said before?
Well, you had five months of runway now now. You know, unless it’s just you I’d be figuring out how to get, you know, 12 months of runway. And that usually is kind of cutting down burn rate. The other is, is, you know, seeing if any of your investors are willing to, you know, pony up for the down Route, I would be taken, you know, there’s always a thing about do you take cash now? Or do you take investment later and what this is now the time I’d be taken, I’d be taking, and I don’t mean this as an insult, but it does make the point, this is where venture capitalists get the get the label of vulture capitalists, because they will be looking around for you know, carcasses of things that are maybe still living and start pecking at them. But you know, what, I would take their money. So there are some VCs who are just going to pull back and they’re doing their lifeboat strategy. Because just as an aside, if if I have a portfolio, now I’m an investor, my highest valuation stuff was, you know, things that probably had huge burn rates. That is they were later stage companies and I was just expecting some liquidity event or some, you know, some Softbank money or some someone else, you know, if the hedge funds and P and sovereign wealth funds start pulling back, those guys are gonna get killed. But what that means for or stage companies is your investors are playing lifeboat and putting their capital in, in higher value parts of their portfolio. And you might not be seeing any money at all, even though you thought you were. Does that make sense? It does. So we don’t know how that’s gonna play out. I think, you know, every venture firm is talking to their limited and seeing, you know, what’s going to go on. But if you think about it, at least with the oil shocks as well, you know, I’m not sure how much money Saudi Arabia is going to be pouring into later stage investments, when they’re going to keep their economy going.
I mean, that’s one of the dynamics that strikes me as being most different about this, the financial side of this crisis versus previous crises. You have all these new players, hedge funds, investment banks, sovereign wealth, private equity, etcetera, that are playing in the later stage markets now enter. Whereas, you know, many of them are new entrants. And weren’t there previously. Lots of activity in the secondaries, of course. How do you see that playing out? I mean, you touched on it, but what do you think is the most likely scenario?
Well, I don’t think we at least I haven’t seen the data yet. But I think that’s, and it’s kind of sad that you know, early stage, companies need to figure out what hedge funds, investment banks and PE firms are doing. But I’m sure the VCs are trying to figure that out as well. As soon as we start hearing, that these guys are pulling back, I think we’re, if I was an early stage company, I’d be again, worrying about burn rate runway, and is there going to be additional sources of funding? Or, you know, like the old days, maybe I can start generating real revenue, rather than just expected? Financing.
Right, right. So you published a graph recently that kind of highlighted the effect on different stages of capital from the business. Yeah,
so this was a chart from Tom Tongass. And I thought it was really interesting. It was just pretty educational for me that said, you know, after the crash in 2008, it was actually seed rounds that recovered early, but later stage funding cratered and took two years to recover. Yeah, I don’t know if we’re gonna see that same data. But it was interesting is that and, and again, it was because you know, the late stage money just pulled out and didn’t come back for a while. But but I’d really want to know what’s going to happen here at that later stage, because that’s going to affect the health and life of VCs. I don’t remember what happened in the 2008 crash. But in the 2000, crash, a huge percentage of new venture firms just disappeared. I mean, just disappeared. They went out of business, hard to remember, you know, with the last 10 or 15 years of just accelerating new funds every week. But there was nuclear winter, not just for startups, but for investors as well.
Yeah, it’s tough to get my head around that right, because there’s many different funds that have closed massive amounts of capital over the past couple years, past few years, and those funds have committed capital they have committed Capital bases. Now, of course, they have to call that capital down. And there will be some defaults. And there will be some institutional investors and allocators that maybe haircut, their commitment or agree to and adjust an adjusted down commitment with some of these funds. But, you know, I’m surprised to hear that in 2008, or at least see in the data, there was this extended period of reduced deployment amongst the series B and Series C, folks. And I wonder if we’ll see that, again, knowing that so many large funds have been closed recently, and that capital is committed capital is not discretionary coming from, you know, family offices or angels that have extra liquidity due to public market
gains. Right. But think about where that capital needs to go. I mean, yes, they now have a bunch of money in the bag. But But I think my point is, and I might just be completely wrong here. But the one thing I’ve, my hypothesis is there’s a lot of later stage investments they have that have huge burn rates that need to be supported. And that a good chunk of those investments are in markets were customer revenue has gone to almost zero. You know, Uber is a public company, but but, you know, Uber business or Lyft, business, etc. A lot of people aren’t getting in an enclosed cab with, you know, a driver who’s been meeting, you know, 50 people a day. And so there are a lot of businesses where, you know, you were expecting a, you know, revenue uptick or revenue growth where revenue is plummeting, but they’re still burning cash. So what do you do if you have 500 million bucks in your fund, and that burn rate in your, you know, biggest investment went from 10 million a month, and now 50 million a month, oops, we’re gonna get interesting. So you raised a big fun, but gee, your biggest thing in your portfolio is now burning five or 10x, more than it was. And so they need to either you know, that the thing of that portfolio needs to either cut back dramatically, and or raise a ton more cash. I don’t know how this is going to shake out, I just just trying to point out that that’s going to affect one way or another investors ability to support other things in their portfolio, that right now, aren’t as valuable. Now, smart VCs will think about those things and look at their portfolio and say, These things, there will be a recovery. And these are the startups I do want to support through this downturn. Other VCs and I’ve seen it in every crash, they equally panic and you know, toss out everything except the one or two, three things they care about. And I think we’ll see behavior, you know, all across the spectrum.
Got it? What What advice would you have for startups getting off the ground, right, like a brand new startups being founded? VCs, like myself, for instance, do have committed capital. So we’re still on the hunt for investments. I can’t remember who said this, but somebody said, the fortunes are created in the down market, or they’re built in the down market, and they’re collected in the up market. So many famous startups were founded in 2008 2009, I believe,
Nick, I think that quote was was made by startups trying to raise money in a downturn. I would have made it up because I think that’s a great quote. But yeah, but I’ll give you an A good example. It was a perfect example of what you just said. So I, I was going to invest in a company who was a real startup doing, you know, automated process for Believe it or not, in vitro fertilization, they were going to apply AI and robotics to the pipeline, and blah, blah, blah, blah. And so, you know, we got a zoom call, and I said, look, the first thing you need to ask yourself is, is, is the world’s going to change enough that that after this downturn, people are not going to want this? Yes, no. And I said, you know, probably the ideas is valid before after. And then I said, and the next one, though, is, you know, you’re kind of in the healthcare, somewhat business, is this where investors in this space are going to put their money in the next three to six months? And the answer is, you know, like, you don’t know, but I bet you a bunch of people in that space are putting stuff into telemedicine and other spaces. It’s not that this is a bad idea. It’s just going to take a very different type of healthcare investor who with a different long range view. And so it doesn’t mean that the opportunity for investment went to zero, but the possible investors probably decreased by about 70%. Does that make sense? See if at all? Yeah, so but what I suggested was something he hadn’t thought about. I said, you know, I know you’re passionate about this idea. But actually, for me, the most interesting thing is looking at your block diagram of what you were gonna do is that AI automated process of robotics and pipetting. And all this stuff could be applied to a lot of things in medicine, not just, you know, in vitro fertilization. Have you thought about repurposing this for something else in healthcare that might be you know, most broader and more applicable? You know, good for him? You said, Well, let me think about that. So I guess the, you know, if I, if I remember, your question is, you know, startups really need to be thinking about, you know, how’s this crisis for the next 90 days at minimum, going to be affecting your your investors view of what they want, and where they want to put their future cash?
Right, well, in a lot of these big vision startups, while I love them, the ones that are, you know, three plus years off of any reasonable commercial validation and revenue, I think a lot of those are going to be really tough to get funding, right, they need to find near term applications that produce real revenue now, while still having, you know, big vision for the future.
Right. And I think the way I described it, and I think you’re saying the same thing, it’s not that the number of investors for even a big vision has gone to zero, but Well, we’re on March 1, there were a, it was a frothy place, and there were 100, you know, people willing to look at those types of deals, there might be five or 10, we’re going to look at those deals, and they’re not going to be at anything close to the valuation you want. So you could decide that no, you still want to do this. And you see that after the recovery, this is going to be, you know, a world changer. And yeah, you know, you will find a couple of VCs who are still looking for the future. But I but I think that back to your point, and the one I’m trying to make is, but that number has decreased, I think overnight dramatically. Yep. Yep.
What’s What’s the single biggest mistake a startup CEO could make at this time? And is there any final advice that you would you would leave with the founders out there?
I think my advice would be on both hands. One is don’t panic. Meaning, you know, don’t randomly do the first thing that comes to your head, when like you realize, my God, we got, you know, 90 days or six months or something, or your investors are screaming at you to cut forever. Yes, you need to do all that. But don’t pat, here’s a simple process to go through, assess, plan, and then act. And so that’s the other extreme, which is, you know, you don’t panic. But don’t sit around thinking you got like a month to like, have some more meetings and committees. And more importantly, you need to start thinking about in this type of crisis, you need to change your culture and the company’s current culture. If your company’s culture was, you know, consultative, and you know, collaborative and whatever, you know, that crap needs to end yesterday. This is not the time for everybody’s buying in. Because if you believe that you really are going to be out of business. You know, you need to, for better or worse, assume dictatorial powers, and make decisions and like, let people know that you’re doing this not to be a jerk or psychoanalysis. But to make sure that everybody in your company and their jobs and their families, you know, have a paycheck and that you’re going to come out of the stronger. But there really is no time for debate and dissension. You’re happy to listen to input, but then you’re going to act. So on the left, don’t panic, but on the right, to make decisions or takes actions and act firmly, quickly.
Steve, are there any resources that you’d recommend to the audience to you know, get more information on how to better adjust, adapt and strategize? And that’s the situation?
Well, you know, obviously, I read a blog at Steve blank.com. But there’s lots of great blogs from VCs. Stanford is now putting out entrepreneurial blogs that STVP and from the business school, Columbia, entrepreneurship has the same. I think you’re seeing lots of great advice all over including, you know, everybody should be listening to all your podcasts.
Do you have a prediction on over under for the quarantine in mind It’s
you know, you know, Italy, as of today now has the twice the number of deaths, as has China. It’s a little sobering. And China, China has zero. I think anybody predicting what’s going to go on is just guessing. I think the bad news is, historically one of our strengths. And what I mean by that is, you know, we’re an independent nation of cowboys. And in fact, you know, that’s the nature of innovation and entrepreneurship. You know, we hate to be regimented. And we hate to be told what to do. Unfortunately, that’s the way you control something like this, as you keep people at home, and you, you know, are pretty rigid about those rules. After watching people party on on the beaches of Florida, it doesn’t seem like the country is prepared for that kind of that kind of behavior. And unfortunately, that kind of behavior results in an exponential curve, much like Italy. Yeah. The other the other bad news with that is that, you know, with the economy being crunched down, at some point, people might make the decision that said, Well, you know, let’s kind of loosen these restrictions. And then I think we’re gonna see something that may look like Italy. And so these are a set of tough choices. And so you’re, you’re asking me to predict, I hope, this just kind of the virus dies out by itself. But I’m, you know, I’m practicing isolation, and I help all your listeners do so as well, and stay healthy and stay safe.
He is de Blanc, the blog is de blanc.com. Steve, very thankful for you to make time for us, especially on short notice, and, you know, help all the founders out there that, you know, are dealing with, with something severe with their businesses, and many folks that are dealing with something severe with their health as well. So thank you for the time, Steve.
All right. Thank you, Nick. Take care.
That we’ll wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest confidently thanks for joining us