The Most Important Concept of 2022’s Startup Downturn is Not Just Surviving, But Staying “Default Investable”

VC David Sacks Was Right When He Said “Default Alive” Is a Trap

In New York City, altitude is attitude and the view from $100b+ fund’s office tower was certainly the equivalent of walking tall, shoulders back. I was visiting during a summer trip and catching up with a fellow investor, a few months into this market downturn. Especially having them involved with a handful of our portfolio companies I wanted to know, how would they be looking at follow-on opportunities — both offensively and defensively. He replied succinctly that they were very much still open for business but with a clear delineation: “we’re ok running an ICU but we’re not running a hospice.” To translate, an otherwise healthy startup who urgently needs care and is likely to be fine on the other side of the procedure will get their attention. But in a bridge to nowhere, the company shouldn’t expect to be sustained until its natural end of life. This seemed, well, perfectly reasonable.

Over the last few months I’ve come back to that discussion in my head when thinking through what advice I’m providing to the CEOs in our portfolio. And the equally impactful statement from about a month earlier that that ICU conversation still holds very very true. In fact, I think David Sacks’ framing in the tweet below might be the single most important near ‘universal truth’ I’ve seen about how to manage through a downturn.

When I say ‘universal truth,’ it’s not suggesting it applies to all businesses. There are lots of quality SMB/SMEs and startups which don’t take venture capital. There are also venture backed startups who just don’t have a path forward and would be better winding down, finding a home, or trying to get off the venture capital curve via a restructuring. But if you are planning on continuing to try and fulfill the founding ambition of the company, and qualify for future venture funding, you can’t stop thinking about growth.

You can manage the cost of it. You can alter the slope of the curve for a period of retrenchment. You can take a step backwards to continue experimenting, go after a different set of customers, rethink whether you truly have PMF, but you need to emerge on the other side of it with a startup that’s investable. Reducing burn and ‘months until cash out’ is only helpful to the extent that you are giving yourself time. Using your capital to relieve pressure of execution by saying “we now have 24, 36, 48,♾️ months of runway” isn’t the goal. In fact, switching to this mentality blindly and solely almost assures you won’t be in a position to raise when the capital runs out.

“Default alive” is nice for knowing how long you can pay your rent but “default investable” means you know when and how you’re going to get more capital into the company. As a CEO, that’s where you start.