Re the Y Combinator email: what should the list be for VCs?
It’s been just under 2 months since YC advised its founders to hunker down in light of the recent market downturn. When I read it, I mostly agreed — I am wired for bootstrapping and sustainable growth in all market climates. But it struck me as missing something. Granted, it was written for founders of high-growth startups — it should be a list of prescriptions for founders from their stakeholder/accelerator behemoth. But the email begs a response. Early-stage companies aren’t the only actors in the startup ecosystem. The underlying assets now have their marching orders on how to change. But how does the VC investor — an expert in the asset class — change?
What if a hyperfocus on post-investment data and analysis (like investors in other asset classes have) could give insight into future investment decisions, help deliver true and bespoke strategy recommendations, lend credible evidence to a fund’s investment thesis, and, ultimately, lock onto alpha and outsized returns (presumably what we’re all here for)? Some VCs are at the forefront of doing this (you know who you are), but for many: collecting and organizing quarterly reporting isn’t “data;” making calls/connections for founders and offering qualitative advice at board meetings isn’t “analysis.”
Here are some thoughts (retooled from YC’s thoughts) for VCs when making their plans to ensure their fund survives:
No one can predict how bad the economy will get, but given that VC is inherently a buy-and-hold strategy, your only unequivocal mitigant for an economic downturn is deeper analysis of the underlying assets. More robust knowledge of your portfolio companies will position you to reduce risk and increase return.
The safe move is not to overreact, but to study, plan, and prepare. If this turns into a recession like the last two downturns (it likely will), the best way to prepare is to double down on fundamentals — use this time to understand your portfolio companies from the weeds up, so when critical strategic pivots need to occur (they will), you’re not just chiming in with gut feelings during board meetings. You will actually know what you’re talking about…for this company. Your goal should be to get to a Deep Dive.
Understand that poor public market performance should drive VCs to distinguish their fund’s investment process as unique and unquestionably accretive. VCs will have a much harder time raising money and their LPs will expect more investment discipline throughout the entire investment period. Investment discipline doesn’t just occur during Sourcing and Vetting. In fact, “investing” and the various activities it entails, continue on after allocation. The VC fund that can show LPs thoughtful and rigorous analysis post-investment, wins.
P.S. If you think this message doesn’t apply to your fund, please reconsider. The days of phoning in portfolio monitoring in VC are over.