Winter is coming?

A picture of a snowy park or bridge framed within snowflakes.

As a writer, I know all too well that removing a word or two, a comma, a question mark, can make all the difference. I left the question mark on the title to this article, but that’s more out of hope than conviction that winter, for startups, isn’t just right around the corner.

Investment in startups is at record levels. In 2013, in the US alone (the largest venture capital money market for entrepreneurs) $29.4 billion was invested, with $7.1 billion going into ‘internet-specific companies’, according to the annual MoneyTree™ survey. There are more accelerators, incubators, angels, alternative funding sources, media outlets, government agencies, and support from politicians for startups than has ever existed in history. As entrepreneurs, we have never had it so good.

But we’ve seen this party before, and now leading VC’s are shouting last call

The ecosystem for entrepreneurs depends too heavily on VC funding to survive intact, even during a mild winter. At the same time it is a far more robust ecosystem, so we won’t witness a repeat of the first dot-com bubble. It will be different this time.

‘Black wings, black words’

Keeping with the George R. R. Martin inspired theme of this article – the first raven arrived when Benchmark General Partner, Bill Gurley, was interviewed by the Wall Street Journal. Gurley is an investor in Uber, eBay and Snapchat. Since 2011 Benchmark investments are said to be worth $55 billion in market capitalisation, with 25 exits in their portfolio. So when a guy on the Forbes’ Midas List says, ‘No one’s fearful, everyone’s greedy, and it will eventually end,’ it’s time to sit up and take notice.

Fred Wilson, a respected VC with Union Square Ventures’ concurred with Gurley, also citing sky high burn rates, excessive amounts of funding and a lack of fear that these conditions will continue, which means too many startups are brazenly operating at a loss. Wilson made the same case four years ago. He is an investor in Twitter, Tumblr and Soundcloud, amongst others.

Wilson said his annoyance with the status-quo is causing him to be a pain in the ass to portfolio Founder-CEO’s, but with good reason. The fear is, even for well-funded startups like Box and Square, that private money markets are going to shut the pipeline off, making an IPO the only option. When you’ve got a few hundred million to burn the fear may not grip like ice, but what about when you only have a few hundred thousand and an angel turns you down for £25,000? That’s when we know winter has arrived.

TechCrunch, PandoDaily and Marc Andreessen of Andreessen Horowitz all agree that the current situation, especially to do with burn rates, is unsustainable. This will push the price of investor funding up at the earliest stages, with angels and VC’s asking for more equity in order to reduce their downside risks.

How to survive?

Stop messing about and start to generate revenue. Social media sharing tool, Buffer, only raised $450,000. They are operating at $3.6 million monthly recurring revenue rate (MRR). They have money in the bank. They are hiring. They are finally raising a more substantial round ($3.5 million),  in order ‘to have enough cash in the bank to survive any sort of downward spike’ in future funding markets.

Wilson said it’s time to go back to the fundamentals: ‘At some point, you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way.’

Generating revenue isn’t easy, but if the choice is making customers happy or working hard to squeeze your last hundred thousand out of a reluctant VC, you should always focus on customers. Do right by them, and they’ll keep giving you money. The same can no longer be said for investors.