The Market Doesn’t Correct Itself, Founders Do
by Ross Fubini and Mars Garza
As the universal They say, we eventually all have to learn how to live with the consequences. And by consequences, we mean the Fed. And by the Fed, we mean the enormous monetary stimulus they are now rolling back.
We all have to re-learn how to live with the cost of capital — money isn’t free anymore.
At XYZ, we don’t like being prescriptive. We don’t think that just because we are all in the same recession, we should all follow the same rules. You know your company, team, and product best. We believe that the players who will come out of this will not only be all the stronger for it, what’s more is that they will be market defining companies with massive net dollar retention, clear sales motions, and novel distribution hacks. How? With product-market fit and cash as their north stars, whatever that might mean for them. Here are the theorems we’ve shared with our founders according to where they are in their product-market fit journey.
If you are just getting off the ground, you probably don’t have PMF yet. That’s ok – the question then becomes, which growth factors will get you one step further along in your journey with a strong PMF hypothesis. This market is milestone driven – so which ones will you need to execute on to raise your next round of funding with 1 year of burn in the bank. We’re not saying this is a waiting game, but it is a planning game. The more focused and constrained you can be at the onset with real figures to chase (both on your KPI list and balance sheet), the stronger your theory of the case will be when you raise your next round of funding.
Ok so you have PMF – some revenue, established sales motion, evidence of retention – and have tons of cash from your monster Series A in the last year. Your traction is important and impressive, but the market is no longer rewarding these metrics to the nth multiple. In other words, you need to grow into your valuation in a cost-effective way. Sure, all the big players are slimming out and there’s lots of talent to be captured. We take the view that growing out your headcount when you have a big number looming over your head isn’t going to grow your revenue by the same multiples that big number is supported by. No, to optimize for exponential growth rather than linear, you’ll need to leverage relationships, solidify partnerships, and use platforms that can either help each employee scale themselves or act as a distribution channel for your own product. When life gives you lemons, use the lemons you already have first.
In this last scenario, you're beyond PMF and your customers love you. Though what’s more important in this market is that you are yes, profitable. Maybe you’re so profitable you could theoretically even acquire a player. Don’t. Focus on maintaining your profitability and your velocity. How? Differentiation. Get creative with your existing customers, move further up market (or down market) – squeeze those lemons. The idea here is to rely on your very own PMF generated revenue until you can raise money in a better environment. There will be a real focus on profitable companies at later stages. Efficiency can set you up for velocity later.
Of course this is all easier said than done. The cost of money is affecting the real economy, real jobs, real people and products. But we believe that the best of you will come out the other side with lots of lemonade.
