Lately, I've been hearing that several funds are warning their investments that "winter is coming."
Yes, that is a phrase from Game of Thrones, but VCs have been using that term well before the show first aired to refer to a time when investing is at a minimum.
The first time I heard "winter is coming," I was a young VC in New York just after the dot-com boom became a dot-com bust. My senior partners at Ernst & Young were warning clients that following such an exuberant explosion of investment there would follow a "nuclear winter" in which many investors would pare back their investing and hibernate.
Now, two decades later, some VC firms are once again warning that entrepreneurs should prepare for a long winter of funding.
But is it true? And if it is true, how can you prepare to weather the storm?
Signs of a Funding Winter
Some pundits, like Fred Wilson, are warning companies to prepare for an economic downturn, and others are even going so far as to warn of a full-blown recession. However, the startup investment data from the fourth quarter of 2018 does not concur.
According to a new report from TechCrunch, 2018 saw the most money invested and the highest amount of private tech company financing ever. On average, private companies raised over 300 percent as much money as they did in 2014. However, this may mark a peak in VC funding.
"After close to a decade of post-Great Recession boom times, some sort of serious slowdown is all but guaranteed sometime in the next few years," the report says.
So even with all that positive growth, the insiders may be right, and the 2019 winter may come. The report's main causes for concern include the hike in interest rates, the volatile stock market, and political uncertainty caused by Theresa May's Brexit deal and the U.S.-China trade war.
Regardless of when, a downturn will eventually come; that is the nature of markets. What goes up must (generally) come down. So, what can small businesses and startups do to prepare? Here are my top tips:
- Manage your spending. Conserve capital. If you don't know if you'll get more, then spend less. Cancel the launch party and pull back on management retreats. If winter is coming, you need to keep your resources as available as possible. So cut back on niceties and double down on necessities.
- Manage your growth assumptions. If you are B2B and your clients are public, then as the economy slows and the market contracts, large companies will slow in adopting new technology, shifting from finding new revenue into becoming more efficient by cutting spending. If you are B2C and a recession hits, then you need to adjust your adoption curve, especially if your product or service is "nice to have" (like Angry Birds) and not "must have" (email).
- Shift your goalposts. Founders normally think about their financing plans for the next 12 to 18 months, but with winter coming, that goalpost shifts to 24 to 26 months. You should rework user adoption, growth projections, and revenue projections from a more pessimistic vantage point.
- Make hay while the sun shines. Before the winter hits, if you have the traction and the growth plan, go raise money. Don't worry about the valuation. Worry about running out of runway before winter ends.
- Double down on core capabilities. Outsource everything else. In times of recession, the best strategy is to focus on what you do best: your unique value proposition. Anything that does not add to those core capabilities should be outsourced or even, when possible, discounted. If you can't be a leader in a market, leave that market and focus on markets you can lead.
- Steal from losers. One person's loss can be another person's opportunity. As the market shifts, many startups will go out of business. Turn this to your advantage by hiring their former employees. In some cases, the downturn may even allow your startup to buy their startup and acquire their employees.
Winter may or may not be coming in 2019. Regardless, now is a good time to reevaluate your financing plans and act accordingly.