Speaker Q&A: How to Recession Proof Your Company

Come with your questions for our expert speakers. Mayfield Fund Partner Ursheet Parikh talks about what he learned from multiple financial downturns as an investor and a founder.

[Music] May I have your attention please welcome TechCrunch editor Frederick ludenoir and Ursheet Parikh partner Mayfield [Music] Yes thank you Lunch is over Time for some recession [Laughter] This is this is not the happiest topic We could talk about probably but well I'm hoping by the end of it it does Become an exciting topic all right well Let's let's try to make that happen now If you haven't been on this stage before It's q a so it's your questions and the Way we're going to do that is You can scan that QR code Just like the menu at your favorite Restaurant and it'll take you to slido Where you can ask questions I'll get Those here If they're good I'll use them if they're Not I'll ignore them but that's up to You And Um while you're starting to get going Here start filing some questions Let's talk about the recession are we in A recession Um it doesn't matter okay because if You're kind of an entrepreneur there is This Um that's primarily the the the core

Thing the way I think about it is like You look at decisions and you look at Like what if you're right and what You're if you're wrong and as an Entrepreneur you control a lot of things And you know their tail risk is actually One of the biggest risks that is Typically there in entrepreneurship by That like there's a few things that are Outside your control uh where like you Control what you build how you spend Your money who you sell to who you don't Sell to how you sort of create a Platform bring amazing people into it All of that stuff but uh and so my view On it is almost like if there is one you Know it's good to be prepared if there Isn't one you're gonna go ahead and uh You know just accelerate on so so in Terms of like Um you know and so be it fundraising or How you're recruiting or opportunities I Think I think it actually provides a lot Of opportunities to create breakout Companies okay and uh and so that and And you know I've had that experience With failed companies and breakout Companies in two different recessions as A Founder so No you don't think there's a risk in Being maybe a little bit too Conservative because you're afraid The market will crash on you yeah so I Actually think that being conservative

All the time in a recession is actually Not the right strategy for every company Okay so for example if you you know you Can't cut your way to uh Uh you know cut your way to like Profitability right I mean the reality Is in startups ecosystem you have to Kind of learn and grow and and so the First thing that I usually tend to think About is how much runway do you have Right how do you second if like there's One of the companies I worked with which Has three plus years of Runway right for Them it's actually an opportunity to Really double down because if they have Product Market fit if enough of their Sales people are successful right it's Not like just one sales person kind of Succeeding and three others not then That is and they are not limited by the Market then such a company should Actually double down and increase more And and and and and and sort of come out Stronger onto the other side uh the only Downside it's less it kind of comes down To this right which is the primary place Where conservative factors show up and It's kind of funny what I'm about to say Next I would say the same thing when I Was an entrepreneur but now that I'm a VC I say the same thing it tends to get Construed differently so you know your Interpretation on it but the generally The point is that any Capital you raise

In these times the valuations can I tend To be different 10 and say you were Raising last year so the core question Is if you kind of get diluted what is it Are you getting if you get a stronger Balance sheet you can sort of invest to Become a category leader because if You're a category leader most of the Evaluations kind of come to you or you Sort of avoid the tail risk in case There's an Armageddon right or you miss Your numbers right and your burn rate Kind of goes up whatever may be the Factors so that is what where that part Of the question tends to be so the way I Rationalized it myself uh you know uh in In 2009 right when General Motors had Gone bankrupt and it was right at the Bottom of the recession when I kind of Store simple uh we had raised an eight Million dollar series a that 8 million All around had happened at like eight And a half three with a 20 option pool Uh but you know we weren't going to go Raise less because we wanted to ensure We had not raised foreign for a dead Spot and a lot of the VCS were kind of Really upset and were unhappy with the Volume of money we were willing to Asking for because they felt that series B's were happening at a pre-money Valuation of like you know 12 or 13 Million so our series a posters those Numbers have changed these days uh those

Numbers have changed these days uh Though you know those very same numbers Used to be 50 and 80 just in 2006 right And so a lot of my viewers I don't want To raise money for a dead spot I'm gonna Go focus on what I can which is how do I Kind of go ahead and build a big company And then when it came to series B I had You know that was in 2010 and and you Know I had right uh you know that spent 2.8 million out of the 8 million raised And ended up taking another 13 million In a series B and and that was like a Reasonable markup to the wrong so so the Point is that my view was it allowed me To sort of go ahead and really hire the Best people execute and kind of create a Category kind of leading company but These tend to be sort of you know Different and companies different Situations different decisions out on That end talking about different Companies now that's if you have a lot Of Runway right now you're you're okay What if you don't have that Runway right Now what what you should be doing yeah So if you don't have a lot of Runway Right now uh I think it it becomes very Helpful to get situationally aware Relatively fast so by that what I mean Is that right now you know generally There's a tendency to have the anchoring Effect and the anchoring effect almost Always is based on sort of recent

Experience and so there's a desire to Think about it and and I've had some Founders I've worked with whose last Round was in two years ago their Revenues have gone up 4X 5x and they've Had done rounds which have not been at Valuations that they would like they've Been like not downloads but flat rounds And things like that and and what I kind Of wouldn't tend to tell them is like You have to think about not the last two Three years but the last 10 years of History right and the average rounds and The average multiples you know if there Is a recession if we there so first we Know that the financial multiples have Corrected reasonably significantly Uh and and what the market hasn't priced In as a recession so if we have a Reception all we have priced in is Simply that money is no longer cheap Because you have inflation and hence a Higher interest rate and and and but if There's a recession there may be Something but but but independent of uh Independent of that what what it sort of Comes down to sort of thinking about is How do you go ahead and understand what Is going to be a reasonably fair value For your company that's what I mean by And then sort of recognize sort of when Are investors willing to have that Conversation with you sure it's really Hard for investors to break like you

Know if they kind of come across as Lowballing you then you know they kind Of tend to get a bad name and so they Don't typically have an incentive to do That you know an unnamed VC friend of Mine is like I'm just taking most of the Summer off why it's like I don't want to Educate how the world has changed I'll Just come back next year when people Have kind of figured it out for Themselves right uh but but I don't Think that's that's really very healthy Right I mean I think if you have the Right advisors and you can kind of get Into that right mindset and when Somebody is willing to engage with you On numbers it becomes helpful to sort of Ask follow-up questions to understand I think a common mistake that happens at Times like this is sort of messing up Your cap table with misaligned investors Okay right so you may end up getting Somebody who wants a quick exit to Somebody who's really focused on wanting To you to build a company or you take You know you're trying to build a Company to sort of go towards an exit in Whatever two three four years but you're Taking money from a fund who's really Thinking about a seven to ten year time Horizon and and like much greater Returns and things like that or like you End up getting money on terms where it's So bad that it just tells you that this

Investor is much more about looking out For themselves at the expense of others Rather than when they are involved with You and on the board they will look After all the stakeholders right I think When an investor gets on a board they Can't be on the board representing their Personal interest there's a fiduciary Responsibility for a board member to Look out for all of the stakeholders in A company sure and and when you see Start seeing some of those disconnects It's it's you know as difficult as it is It's probably better to not sort of take Money in those situations right but Difficult choice for a Founder who might Be thinking I really need this money Right now if you're in a crunch yep you Don't necessarily have that luxury right Yeah no I've been been into the Situation where I had a signed term Sheet that where even the investor put In a bridge towards the term she while They were finishing their diligence and The market changed and they basically Asked us to keep the bridge and figure Out how we're going to go fund ourselves After that right and that that kind of So so now I I totally get that part of It out sure I think the other part is About sort of you know in markets like This people really want to understand as Investors how are you setting yourself Up for an up round as the next round

Right a good multiple 2x 3x 5x up around As the next round for that what Milestones are you going to need to Achieve are you raising enough for that And then what multiples are you assuming For that next round either right because It won't be the multiples of 2021. there Will be the multiples of 2014 2013 Something like that or the average of The last 10 years so learning from History right yeah yeah we've got a ton Of really good questions here uh some You've kind of hinted at but let me pick Out some of these here Um What advice have you given your Portfolio companies lately in terms of Capital efficiency you kind of hinted at Some of that but yeah so I think it uh It kind of comes down to where sort of Companies are in terms of their cash Running for companies that have you know Uh product Market fit are sort of Showing and Opera are seeing an Opportunity to truly break out uh for Them there is a true opportunity to Really invest and sort of Double Down For companies that sort of were thinking About sort of around because a lot of The things were happening more sort of Preemptively uh you know we are now sort Of asking the question you know what is The key value inflection Milestones Right like start thinking there's almost

Like as an entrepreneur you have to Think about you there's two products you Sell one is the product that you build For your end customers the second Product is your stock where the customer Is the investor right and so Understanding what is the investor Thinking about so an investor is Thinking about sort of Team risk Market Risk Technology risk sort of competitive Risk you know LeapFrog all of that stuff Like that and and sort of have a Framework about what are the things You've proven out at this phase And what is this next round and what is The stage it takes you to and how that Sets it up for that long term because as Uh as entrepreneurs or especially as a CEO right you generally want your Company to be going up and to the right When you sort of have it down and you Know it becomes really hard to regain Momentum especially in a geography like Silicon Valley where you know your best Team members can kind of just sort of Walk out the door so so it which is About get razor focused if you were Doing three four five things pick the Only one or two things that are really Going to go matter you can do 10 things One at a time right so uh ensure that You basically sort of are getting to the Milestones and then giving yourself six To 12 months after that to raise the

Capital right don't assume that the Capital raises will happen sort of Immediately how do I pick what I focus On though at that point because again I'm I'm kind of in a tough situation There yeah so I think it's sort of you Know at the end the core of a company is Built amazing product and sell more of It right so it depends on what phase you Are if you are in the kind of category Of a company where you have to invest a Lot of money to build product uh either In deep Tech or in Hardware elsewhere Right then you're really trying to kind Of go ahead and show how you have built This amazing product Um and and there often it is about how Much do I do on the stuff that is going To be valuable three years from now Versus a year from now how much do I Invest in that versus getting the Product validated with key Lighthouse Customers right it's it's it's you know Because in times like this investors are Finding so many companies that time Itself becomes sure so when you have Amazing technology or an amazing product And there's enough validation so if You're not already in big revenues if You are a relatively early stage who are The big customers who are your big References right which are the awards You're kind of winning on it right so Those kind of factors become helpful

Sure in sort of getting people's Attention and then you can get the time To kind of go and work through that if And if you're about sort of bit selling Product then it's much more about which Strategies are turning out to be more Effective that you sort of focus and Double down and you've mentioned you've Talked about Milestones a bit Um how what's your advice in setting Those milestones and then picking the Right ones yeah so It does tend to be sort of specific to a Company and specific to a sector If it is in the the product sort of side Of the house then it is really about is There sort of science or Tech risk then Have you sort of built this product then Does this product have attract kind of Lighthouse customers right is it kind of Scalable so it's like how do you kind of Create a range of proof points around That now the shipping of the product is Just the start of the beta of your sales Process so then you are sort of figuring Out you know what is your GTM motion is It sort of a Bottoms Up trial LED how Much of it is Enterprise sales you have To sort of go down this proverbial sales Learning curve right so how many sales People are able to sell the product Right like first how much can you sell Without the founders being involved and How much can you sell without any of the

Engineers being involved and how much Can you sell you know with just the Sales people kind of going and doing it Right Um and and so it's it's kind of getting A sense of the maturity so so these all Sort of will end up being kind of Different factors then it's about like Are you in a market which is well Understood and known or are you sort of Going to have to create proof points on The scalability of your business model Right and and so sometimes you can have Like say a million in in ARR but that May come out of like say 50 customers at 20K each and and uh a reasonable thing That a cost and if that is what the Business is going to be at scale then You know a a VC probably would want to Understand can you have 10 000 of those Customers you could be selling to right In other words is the Tam 100 000 Accounts and can you get 10 000 of those To build something meaningful versus uh You know do you need to kind of be if Like say you're doing vertical SAS Software those are ones where if you Have 20 customers you know with 50k each Even that may not be enough because There's probably only a thousand named Accounts to sell to right and so you Have to kind of uh so so it's also the Texture of the number so there's not no Standard formula for sure sure out on it

Now you talked about Um startups uh narrowing their focus a Little bit get audience question here is Asking do investors start narrowing Their sector Focus during a recession Like especially with respect to early Stage Investments uh so uh so I think The short answer is I yes because what Happens is when you see uh you know when When generally First investing if you put on the Investor side on it is also reasonably Emotional right because uh you know you Kind of this is a great time to be Investing right this is like we're Busier now than we've kind of ever been Because not just because we're looking At lots of things but now is genuinely a Great time you can recruit people you Can engage in conversations right like It's versus like when the market is so Frothy that when you ask too many Questions people are like well we don't Have time to answer those okay kind of Thing and so you do find that firms do End up having to look at what is the Core competencies right and and what are The areas and sectors that don't seem Very kind of viable Um and and and end up sort of picking Kind of focus areas I would say in a Time like this you will find a lot of The geographic Focus come back so when So what what happens is that people kind

Of go back and look at you know where You know does does this team or is there A reference point or a recipe Auto Process or the community around this Team that's kind of helped it sort of Become successful and and generally People know that for companies that make Impact right you can do a lot of it Generally remote but you need reasonably Deep relationships and all things being Equal right dealing with people is Easier with people across a distance Kind of thing sure Um and so from an investment decisions Perspective you know generally I've seen In each of these recessions right when The the Market's going great you know Tech spreads everywhere in the country Then when things get coughed a lot more Of the core centers start having you Know more you know just getting a Greater critical mass of investment and So that would be an example of a place Where now we see is one you know much More likely to then be more focused Around their geographies than almost the Same thing but you know investing at a Distance are there any specific Verticals you're looking at specifically Right now because of the recession or oh No we are investing out just generally Out across the board so we do you know Software you know consumer and Enterprise we do Hardware we do silicon

We do Planet Health we do human health And no changes to that because no Changes to that uh what does sort of What we do look for is like are we Raising enough so any new investment That is happening right now it's also Happening with the mindset that the Milestones you have to achieve for the Follow-on round are higher which means That we have to go ahead and raise more Capital so we are actually seeing some Cases where normally a company would Have just diluted 20 from one VC uh but You know the belief is that they need a Lot more capitals of 10 million they Need 20 or 25 million to get to that Next stage and and you know inherently Doesn't change the current value of the Company but then the teams are choosing To sort of go ahead and You know dilute more and take that Capital to set them up for that strong Next station And maybe a follow-on questions also From the audience here Um a bit more General but but what are Some of the Industries or sectors that That you think people can be successful In right now to become entrepreneurs Like you talked earlier on about how This is a good time to build a long Lasting company some degree right yeah Any specific I think I think I tend to sort of feel

That the smartest people are the ones Who are kind of coming in through the Road they're the ones taking the leap uh As as entrepreneurs and and so I think it keeps on coming back down to Right like what is the amazing product For home and how are you going to go Ahead and design your business for high Operating leverage in other words how Can you acquire customers in a way that You can kind of scale up and you know One of my sort of anti-portfolio things I would put coming out of the last Recession was Zoom and you know I was Like Hey WebEx you know it's working Just fine Just fine Again right clearly this hence it's in The anti-portfolio right uh where but The the I'll tell you when I kind of put My entrepreneur hat on the one thing I Am really appreciative of is venture Capital in court scales linearly right Because you can have like at the model Forms the more the opportunities and and At a certain at the end of the day You're gonna only have a handful of Investors out in your form and and and And I actually think that there is Plenty of capital around in the Ecosystem what has changed is people are Asking more questions people are trying To sense whether you're situationally Aware uh you know how are you going to

Partner do you have the grid to kind of Get it over to the other side right like What is the what is your agility in in How you sort of build the company how You adapt all of that kind of stuff like That but I don't think that this world Is the Armageddon sort of world it's far Far from it I mean I think if we are in Like this one or the two years then it Will be like 2008 2009 or like 2001 2002 But Um I I genuine like there's plenty of Capital in the ecosystem sure sure are You finding that The founders are ready to answer those Questions are they thinking about well Everyone they're talking to every Founder every company is different but Yes there's a lot of Founders who uh it Kind of comes down to how you sort of Start taking the first principles view Also who your sort of advisory kind of Network is who you're talking to Um you know the last 10 years right the World's not seen like for me my first 10 Years uh after my undergrad were very Different right graduating in 98 I came To Silicon Valley in 99 had started a Company then and you know closed around Um got us a bunch of customers raise the Serious ba and then that round fell Apart and had to kind of overwork Through layoffs and a lot of customers Went back and all of that kind of stuff

And then coming out of it it never felt Like a bull market and then the 2008 Crisis happened and so like between 98 And 2008 I'd seen two of the deepest Recessions of their kind of history and That's in in the last 15 years have been A far kind of cry you know from that so Uh yeah it's as I said I think so how do You kind of go ahead and you know you Don't there's no need to panic there is No it's not like you know The Hitchhiker's Guide to the Galaxy the First line of the book right it's it's Kind of not like that don't panic Induced to sort of say Panic it's it's Actually a really good time to be Building a company engaging in Conversations uh I think the key is not To sort of react emotionally in any of These things and if people are engaging And willing to give time really Understanding what they're looking for What do they need right understanding uh Generally what has changed in the Venture ecosystem in the last few years Is it's often harder for people to be Truly honest because the fear is if I'm Truly honest then you know I can I'll Give you a good reason to why we are not Investing them but that may not Necessarily be the primary reason Because people may take offense right But honest in terms of my motivations Are honest in terms of my

Financials like feedback okay great so Because here's the thing right see every Investor conversation you have is very Much an opportunity to improve your Pitch right and kind of see and Recognize it right and and I believe That you know investors spends time with You they learn about you and your Business you should get something in Return whether they invest or not right And that right uh and so I think that But but you know if people if if uh then So I will usually ask people if they Want feedback and then if they do then I'll I strive to kind of be as Transparent because my feeling is Whether I'm invested with you or not I'm Rooting for your success as long as your Company is not going to harm the world I Believe entrepreneurs change the world And you know the large companies are not The ones who are going to go ahead and And solve big problems sure some Investors are fine with startups that Try to hurt the world but Um got a bunch of questions here maybe We can just get through some of these And a lot of this goes back to funding Rounds and kind of the technicalities There but uh what what should the Approach to valuing a series a startup B These days what forward Revenue multiple Should found us in investors be be Aiming for is one of the questions here

Um I think uh this uh the Uh I'll I'll answer this question but Not in the ref frame or reference that's Kind of provided here at the end of the Day investors can only own so much of Your company so if the investor is going To sort of be in on you know invested With you on your board in a classic sort Of you know lead seed investor or a Lead Series investor it's worthwhile for you To understand what their fund model is Right how much do they invest for what Kind of ownership you know whether that Level of capital sets you up to get to Sort of the key milestones and and That's invariably how a lot of the Valuation numbers end up kind of getting Arrived arrived on out on that end which Is kind of different from like oh here's A formula right at CDC I need to have 2 Million in ARR I mean series A's are Happening with on PowerPoint even now Right with first-time Founders even now To like uh so so there is no sort of Necessarily fixed formula it's much more About you know The engagement the interpersonal Dynamic Uh if you know one thing that I feel Becomes is that there's more to Your lead investor than just the money That they are kind of giving in right And and this construct of what is the Value that they are adding whether Whether you do this or not I would I

Would steadfastly recommend against Taking money from anybody on whom you've Not done reference checks right you know Right ask them for reference checks or Do back channels but you want to Understand whether it's going to be a Fit how are they going to be aligned What is this kind of relationship going To be uh and uh and then you know the Early stage investors are used to giving The highest multiples right when you Invest in a zero Revenue company it's an Infinite multiple uh and so while the Public market multiples you know may Have gone from 50x trailing to like you Know whatever 10x trading right it's Coming to series cdb Will show up but the a depending on what Like during 2021 what was the series a Was really in most you know five the 2021's top you know I would say the top 10 series is of 2021 used to be series B's of like 2018 used to be cdc's of 2016. right so in evaluation pre-money Evaluation those we've definitely seen a Lot of that Um maybe the wrong question for you but I'm going to ask it anyway what about Bootstrap companies amazing why not I Mean see the thing is the Venture funded Model is not you you know there's many Ways to build companies and the the the Venture funded model is one right Typically the idea being in that kind of

Model the expectation is that you know From seven to ten years of your sort of First Institutional capital in that You're sort of trying to go and be a Multi-billion dollar Community 10 Billion dollar kind of company uh and That has its own sort of momentum but Doesn't have to be that way so Um you know some of the most amazing Companies were bootstrap for the longest Time right I don't know if you guys know If a company called automation anywhere Right that company was bootstrapped uh You know when I was an entrepreneur uh The CEO of near Shukla was uh we were in The same sort of CEO coaching group Called The Alliance of CEOs and and uh And and so yeah no I mean there's There's absolutely if you can boost like At the end of the day if you are doing a Company to make impact the investor Dollars can only take you you so far if You really want to make the impact your Revenue and the gross margins of the Business create a way more sustainable Sort of way to reinvest in the business For impact sure and and the Venture Dollars just have to help you kind of Kick start that effort but if you can Get there with customer dollars you know There's a there's a company called Viva Software I don't know if how many people In the audience have heard about her It's uh you know it's what's somewhere

Between 30 and 50 billion you know the Stock market's very volatile uh that Company just did one round of four Million dollars Right and never did another round after That so yeah sure plenty of those around Now uh this is we were slowly running Out of time here but everybody wants to Answer to this question apparently According to my My iPad here Um with the hyperscalers so AWS Azure Google Cloud growing bigger and bigger And getting into the SAS space now yeah How do you think a startup can build a Mode there yeah I think it's one or two Categories uh either you basically have You know amazing product LED sort of Adoption that then kind of drives Discovery and then based on that you can Learn enough about your customers on how To Delight them and then sort of find a Way to make enough sales people Successful at scale because Bottoms Up You know can take you from 0 to 10 0 to 20 50 100 but like eventually you know You do need to sort of go ahead and work Through Enterprise budgets and kind of Go and sell or you sort of build a Product that is really delightful for a Core set of people on a big unmet need And you really over service those people And in a way where you can actually Build an Enterprise sales motion and

Make that part of it successful uh I think uh the big hyperscalers Themselves are becoming kind of bigger And and more bureaucratic and there's a Reason why like every decade you get and And whatever are those dominant Companies doesn't like Microsoft is one Of the few which has stayed consistent You know across the last three or four Decades you know Apple disappeared for a While came back right but there's a lot Of other big companies like it was sun And for a while Oracle was kind of like That and EMC I mean they're like uh so So I think there's there's uh I wouldn't Worry uh I I wouldn't be paranoid about That as much as am I really focused and Am I really finding fire right I mean You know when you kind of get that Product Market fit and the repeatability And the scalability of the model and and When your sales people are becoming Successful and you do want to be very Tactically focused on numbers but always Have a strategic roadmap in mind right Where is your core competency how are You going to go ahead and and like Knowing fully well if something is very Easy for a hyper scaler to do as a Natural extension right how are you Gonna going ahead and just presume that They are there presume that they are in The room telling your customer they have This on the roadmap will the customer

Still buy your product right the you Know your bar on what you really invest In has to be something like that All right nine seconds left last Questions how long do you think the Recession will last and you can answer That in one sentence uh don't know right I don't know if we are in one either so You know fair enough uh but uh but yeah Plan for two years that's generally the The thing right beyond that we will see Plan for two years we'll talk again here Next time about how everything is great And people should plan for the bull Market well you should always plan There's always a bull market somewhere Right I think Jim Cramer says that Doesn't make this so yeah and and this I I I mean again I'm a big fan of like Really doing companies in these times You know the entrepreneurs disappear the Real entrepreneurs are there uh frankly Even the investors who are investing at This time are good investors right they Actually have the stomach for sausage Making they are willing to take risks And leap out on that end right there's Nothing like a cheap deal invention is There a good deal or a bad deal because The the way Venture forms are set up Distributions almost always get sort of Driven we eventually like an investor Can only lose one extra money in an Early stage company right they are in it

To sort of for their to for their LPS to Kind of get much more backgrounds Those nine seconds are over thank you Very much thank you all [Applause]

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