🚀 Navigating a new market

Plus, announcing a16z's investment in Locale!

May 22, 2022

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There was one big story this week: how the economic downturn is impacting startups. While the recent turbulence started in the public markets, the last few weeks have made it clear that startups and crypto may also feel some pressure.

In what’s being called the “RIP Good Times” piece of this generation, accelerator Y Combinator sent founders an email titled “Economic Downturn” (full version here). The crux of their advice? Cut costs as much as possible in the next 30 days, and try to reach “default alive,” as fundraising may be challenged for the next 24 months.

Manish Singh @refsrc

YC's message to founders:

YC’s advice echoes what many VCs are telling their portfolio companies. A few months ago, having 12-18 months of runway (cash required to operate the company) was considered “good.” Now, many investors are advising founders to target two to three years of runway. This means refocusing on sustainable, high margin growth - in contrast to a market that previously rewarded growth at all costs.

David Sacks @DavidSacks

Most important: You have to honestly assess your ability to fundraise in a downturn. The bar has gone way up. Give yourself time to fix any problems in your business. Cut burn asap to give yourself that time.

Another common piece of advice? Raise an extension round to build a cash “cushion” - often at a flat valuation or a slight uptick compared to the previous raise. Gusto and Faire both recently raised extensions. In more normal markets, founders often want to avoid extensions as it increases dilution they take from investors. But in this new market phase, many founders feel that the more cash they have, the better!

Ryan Petersen @typesfast

Now seems like a good time to dust off the memo I sent to @flexport's team in early 2019 to explain why we raised a billion dollars of venture capital back then. Many of our employees and most of our existing investors thought it was too much dilution.

On the other hand, some investors feel the current volatility is being overhyped - and may not have that much of an impact on early stage founders, particularly at the seed and Series A. Neo CEO Ali Partovi cautioned founders against killing their companies with “self-inflicted wounds,” by slowing down and preserving cash when it’s not necessary, preventing them from reaching important growth milestones.

Ali Partovi @apartovi

Unlike VCs predicting doom, I’m bullish for early-stage startups. This downturn differs from 2000 & 2008 (see why below). If you’re an early-stage CEO, don’t panic. Don’t obsess about extending runway. Obsess about making something people want, and hire superstars to help. 1/n

How can founders know if they need to make changes to their business in order to adapt? The growth investing team at a16z shared some frameworks for re-evaluating valuation and burn multiple, as well as scenario planning for different outcomes.

David George @DavidGeorge83

5/ How do you know if and when to make changes? We advise planning for 3 scenarios – base, best and worst -- and outlining expense plans around each. Track where you are and be ready to adjust from one plan to another if trajectory changes:

While it’s a time of turmoil, it’s also a time of opportunity! It’s already gotten easier for startups to recruit talent, as large companies institute hiring freezes and comp packages come back to earth. And, as YC told founders, you can capture huge market share “just by staying alive.” The competitive landscape tends to clear, creating space for founders with real insights and compelling business models.

And as a side note - we are still very much open for business at a16z! If you’re working on a company or know of a company we should meet, send us a DM on Twitter (Justine and Olivia).

what we’re following 👀

Apple has delayed return-to-office plans for employees amidst rising COVID cases.

TikTok is launching games - and is already testing them with users in Vietnam.

Lots of news from the a16z team this week! Check out the 2022 State of Crypto report, and the announcement of a new $600M games fund (the hype video is 🔥).

🎉 Investment announcement! This week, our team at a16z led the seed round of Locale - a marketplace that allows consumers to buy products from local merchants, delivered in one order for a flat $5 fee.

How does Locale differ from all the other food delivery companies? First, it operates via a unique pre-order model. As a Locale customer, you place your order by Thursday and items get delivered on Saturday. This allows merchants who may not be able to keep up with on-demand orders to offer delivery for the first time!

Locale also expands a merchant’s delivery range to 300+ miles, allowing them to reach fans of their products who may not live locally. The Locale network makes a merchant “discoverable” to a new set of potential customers, who will take a chance on them because of the platform’s curation - they take only the best! 😋

Batching orders allows the company to operate more efficiently, and improves the consumer experience. You can shop for products across merchants, and everything gets packaged together and delivered in a Locale box at one convenient time.

Locale founders Chris Clark and Jonathan Friedland started the company in their hometown of Los Gatos, spending nights and weekends fulfilling orders themselves - and running the company on a Google Form! Locale is now live throughout the Bay Area and LA, and is coming to San Diego this month. The company has a slate of more than 150 merchants offering products to thousands of customers.

Read more from the founders here, and check out Locale here!