A Chance to Become Anti-Fragile

Many private companies are seeing the market and wondering what it means. Here are some thoughts on how to navigate this. (Anything useful is based on the experiences of my teammates at Sequoia and the incredible founders who have survived/thrived in all markets):

1. This is a correction: The MS unprofitable tech index is down ~65% since Dec 21. That is a big drop but it brought multiples down to historical averages. No one knows where markets will go but current multiples are much closer to durable reality than what we saw the past two years.
2. Your valuation is not what you thought it was: This market change may not be your fault, but it is your problem. If you raised in 2021, your company is probably worth something like ⅓ of your last valuation.
3. Embrace reality: If you believe the above point does not apply to you, I would encourage you to compare the implied revenue multiple of your proposed valuation to Snowflake’s, who has $1.4bn of revenue, 102% YoY growth and 27% FCF margins.
4. You need more runway than you think: Many companies think they have enough runway. They don’t. It takes a long time to triple valuation (if you are targeting a flat round) in a rational market. It might take 4+ years to do this. If that’s true, you need 5+ years of cash.
5. Free Cash Flow is the destination: Ultimately, investors are underwriting your ability to durably produce free cash flow. In order to believe that, they need to see durable growth and improving profitability.
6. People will look at certain metrics to judge whether your growth is durable: If you’re a SaaS company, three metrics that matter: NNARR / S&M, NNARR / Burn, and Net Dollar Retention. Excellent is 2, 2, and 150%. Good is 1, 1, and 120%.
7. Metrics that matter for transaction based businesses: Unit economics (positive / improving), 12-month user retention (stable / improving in new cohorts), transactions/user for the retained user (smiling cohorts). Payback periods of <12 months will also help.
8. Your P&L will show if you’re improving profitability: If you’re losing money, you want EBITDA as a % of revenue to be improving every year
9. Efficient growth is what matters: Accept that growth rate will decrease with the efficiency and payback constraints. Everyone has been buying some of their growth with inefficient spend. By extending runway, you buy yourself time to build from a stronger foundation.
10. Invest in Product: Product improvements are your way out of this. Focus on i) increasing organic growth (or make it easier to sell without heavy sales and marketing), and ii) increasing user and dollar retention. Unlock spend when you have the right efficiency and payback metrics.
11. This is a crucible moment: My friend sent me a note at one of Instacart’s crucible moments. It ended with “You have a chance to become anti-fragile. How lucky you are.” I would echo those sentiments here. This is a painful time. It is also an amazing opportunity. Go get it.