David Sacks: I published “Blitzfail” in late February, and the last pitfall on the list is: macro-shock meets unprepared company.
A week later, Sequoia published “Coronavirus: The Black Swan of 2020.” We’re going into one of these periods where some macro-shock hits the startup ecosystem and fundraising either dries up completely or investors reevaluate their fundraising criteria. It happens once or twice a decade.
A high-burn startup that meets a macroshock is a recipe for blitzfail
You thought there was always going to be a bigger, better deal out there and raised your burn accordingly. Then, all of a sudden, there’s a macro-shock. That’s a recipe for running out of money and dying.
In the 20 years I’ve been in Silicon Valley, we’ve had two of these macro-shocks.
The first one was the dot-com crash, which started in 2000 and went on to about 2002. Fundraising dried up—it was just about impossible to raise money. PayPal did, but it was really hard and we turned over a lot of rocks. You saw companies slowly run out of money and die. There’s a website called fuckedcompany.com that memorialized the startups running out of money and dying.
Then you had the 2008 real estate crash, which caused the Great Recession. This time, it wasn’t the venture asset class that was troubled or toxic; but it depressed valuations and made it much harder to fundraise for a time.
If it’s necessary to cut burn, do it ASAP
One takeaway for founders is to make sure you’ve always got a sufficient cash cushion to weather a storm. And if it’s necessary to cut burn, do it as soon as possible, so you can start to benefit from the additional runway. The sooner you cut, the more runway you get on the other side.