A Framework for Navigating Down Markets

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Hey friends 👋 ,

Happy Monday and welcome to the ninth issue of Through the Noise!

Today we're diving into VC with a framework from a16z to you help navigate market downturns.

It's time to strap in and enjoy.

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A Framework for Navigating Down Markets

Andreessen Horowitz released a framework for navigating down markets. Here is the simple 3-step process every founder must know:

1. Reevaluate your valuation

Start by quantifying how your valuation multiple has changed.

People were paying 400x forward ARR (annual recurring revenue) for the hottest companies.

Public markets provide the best basis for recalibrating private growth valuations:

Public markets are the first to react to falling valuations.

Software valuations have dropped 12x → 5x from the highs in October 2021, representing an almost 60% decline.

However it can take 6+ months to see what impact the public market downturn has had on venture funding.

Deals that are being announced now were likely priced and closed in Q1.

The true effect is yet to be realised.

Compare your ARR valuation multiple to relevant public companies revenue valuation multiples.

If they’re down 60%, chances are you’re in a similar position too.

Find out what ARR you need to fulfil your last round's valuation.

To justify a unicorn status ($1B valuation) with a 5x forward revenue multiple you would need to generate $200M in next 12 months revenue.

You can adjust this with a 'premium':

The growth rate of your startup is much higher than public comparables.

Let's assume a 50% premium (7.5x forward revenue multiple).

You would still need to generate $133M+ over the next 12 months if you were a 'unicorn' on your last round.

Your objective should be to hit this revenue target with at least 12 months of runway.

Less than 12 months of runway before your next raise and the signal you’re sending the market is unattractive, especially in this climate.

2. Control your burn multiple

Ensure efficient growth.

Burn multiple = cash burned / net ARR added.

For example, if your company burns $20M to add $10M of ARR, you would have a burn multiple of 2.0x.

This is more relevant than other efficiency multiples such as LTV/CAC.

Your burn multiple takes into account business functions across the entire company, not just sales and marketing.

3. Scenario planning

You have to keep careful watch on your cash position and runway.

Setting a base/upside/downside case is important to adjust spend and investment in relation to macro events.

Once you have these plans, assess where you are on a quarterly or monthly cadence.

Then you can adjust your spending and hiring accordingly.

A16z has a great graphic for this as a “good” burn multiple is different for different stages.

The objective is to reduce this burn multiple over time to ultimately zero as you become cash flow positive.

You can find the original source by a16z here.

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Through the Noise Podcast

E9: Shomik Ghosh - Investing in Enterprise Software

Last week we recorded the ninth episode of the Through the Noise podcast.

Our guest was Shomik Ghosh, Principal at Boldstart Ventures, a day one partner for developer first, SaaS, & crypto infrastructure founders backing the likes of Snyk, Blockdaemon, Kustomer, BigID and Superhuman. At Boldstart, Shomik invests in enterprise software with pre-product founders.

We discussed:

• How to build a great culture from the start

• Startup failure from premature scaling

• Key indicators of startup success

I now have the pleasure of calling Shomik a true friend from what was a spectacular conversation.

Catch the episode on Spotify, Apple and Callin.

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That's all for today friends!

As always feel free to reply to this email or reach out @thealexbanks as I'd love to hear your feedback.

Thanks for reading and I'll catch you next Monday.

Alex