Thread by Tom Loverro

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PREDICTION: There's a mass extinction event coming for early & mid-stage companies. Late '23 & '24 will make the '08 financial crisis look quaint for startups. Below I explain when, why & how it will start & offer *detailed advice to founders* on surviving the looming die-off. /1
First, context: “great” startups will always get funded, albeit not on 2021-style terms. Many “good” startups will endure down or flat rounds. Many merely “ok” and pre-product-market-fit startups will die – at a greater rate than anything we’ve seen since 2008. /2
Many startups raised ~2 years of cash in 2021 and 2022. They cut burn in H2 2022 to extend that 🛫. But no matter what, they’ll need to raise again (or sell, or become a 🧟) in late 2023 and 2024. /3
4 in 5 very early-stage companies have fewer than 12 months of runway, according to a survey of 450 founders last fall by January Ventures. /4
All of this points to a FLOOD of startups coming to market to raise capital beginning in H2 2023 and continuing through 2024. More will seek capital than will get funded. What you hear now is the quiet before the storm. /5
Late 2023 into 2024 will be worse than the Great Financial Crisis of 2008-9 for venture-backed startups. GFC was centered on Wall St. Private startup valuations, round sizes & burn didn’t go bananas in the years leading up to the GFC. /6
This time is different. 2021, for startups, was more toxic than the GFC. The hangover will start later this year and will be more severe than that from the GFC. /7
You’ll see a flood of startups raising 💰. Gun-shy VCs w/ alligator arms will slow their pace, take less risk and fund the startups with the most concrete traction. Timid LPs will hide under desks. /8
Meanwhile, reluctant insiders will debate doing pro rata in bridge rounds. Many rounds will involve structure. Layoffs, firesales and shutdowns will ensue. /9
But we're not going back to 15x+ fwd revenue multiples even for excellent companies in the public markets. (We're currently at ~4.5x for most companies and 8x-12x for the elite.) Private mkt multiples may not match the public markets but they will come a lot closer! /10
“Oh, but Tom, what about all the talk of dry powder that will make valuations go back up?” FALSE for the following reasons: /11
A. Funds won't deploy their capital in 1 yr (unlike 2021) but rather in 3+ yrs, dividing that powder by 3 or 4! Yikes!

B. Many funds have already been partially or mostly invested; their next funds might be smaller and take 2x as long to raise, b/c of LP constraints. /12
C. 2001-2004, there was also "a lot of dry powder", but valuations still plummeted and words like “structure”, “ratchet” and “pay-to-play” were commonplace. Look them up if you need to. For instance: www.cbinsights.com/research-what-is-a-full-ratchet
/13
To survive, here’s 7 steps early-stage founders should take: /14
1. Raise 💰now or sooner than you expected, before the Great Flood 🌊of 2023. If you fail, you can always try again later. But if you wait, try later & fail, well… /15
2. You did a layoff & cut burn? Great. Now cut burn even more. Cut what’s “good to have” but continue to fund core R&D. /16
3. Focus on survival, not valuation. Don’t let your ego or anchoring bias kill you. Public company stock prices go up and down every microsecond. Your stock price fluctuating isn’t fatal. Running out of money is. /17
4. For mid and later stage startups, bring on seasoned operators in C-level roles and for some companies of scale, it might even mean bringing in professional CEOs. Done right, this allows founders to play to their strengths. /18
5. Trade better unit economics for growth. Growth rates are coming way down for everyone this year. It’s all relative when you’re raising money. If you can nail your unit economics, you can always ramp burn and growth later. /19
6. Play your cards right, survive & go on OFFENSE. The best time to build & take market share is when your competition is dead/in retreat. 2021 felt like the best year to build a startup but it also felt like the best year to buy high-growth stocks ;) Now is the time! /20
7. Be decisive. Half-measures rarely succeed. /END
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