TechCrunch+ Revises Their Advice for Startups

In light of the specter of both inflation and recession rearing their ugly heads simultaneously, TechCrunch+ has published an article by Matt Cohen, founder and managing partner of Ripple Ventures, that provides timely advice for founders of startups. TechCrunch+ reports on technology firms, startups, venture capital firms and Silicon Valley. The essence of the advice is for founders to go ahead and ask for a flat or down round now if their startup’s runway does not carry them through the next three years.

Matt Cohen makes it clear that no one wishes for bad economic times, but that founders need to act quickly to shore up financing, if needed, in advance of the ever worsening financial news. Cohen is aware that founders will be hesitant to go to their venture capitalists or investors for flat or down round financing, but this may be the only way for startups to advance through the shoals of what is coming financially. He wants to assure founders that investors are just as aware of what is coming as they are. TechCrunch+ states that other startups in the investor’s portfolio will get funds instead of their enterprise if they do not ask for the flat or down round now if needed.

A key takeaway from the article is that TechCrunch+ is suggesting that founders look to ensure that they have a three-year runway, instead of the typical six to 18 months of runway. They call three years ideal and two years a minimum runway. If your enterprise doesn’t have enough of a runway, they are stating you need to go ahead and ask for down or flat rounds of financing. TechCrunch+ suggests that investors won’t be keen about the dilution that down or flat rounds create, but they prefer write-downs to write-offs because the economic backdrop is proving the latter will become prevalent.

TechCrunch+ believes that startups in the Series A round are particularly vulnerable right now. They are reporting that the past few months have seen more and more startups find that the well for Series B financing has dried up. They stated that it is likely that a new norm during the financial downturn will be bridge rounds that occur after Series A financing in order to tide startups viably through the near future. As they reached for an adequate label for these intermediary rounds, TechCrunch+ seems to have on the whole decided to call them “A2” rounds.

TechCrunch+ even hinted that some firms may need more than one post-A round bridge to get them through to the other side of the economic downturn. They stated that, after their experiences in 2008, it is clear founders need to resort to flat or down rounds, in light of current economic conditions, if that will mean the difference between viability and closing shop. They also suggest that those who hesitate to secure their long runways now run the risk of not being able to obtain the rounds later and that such startups will not likely remain viable.

TechCrunch+ also implies that startups should remake their team leaner, so that they can garner more profits from existing revenues. If they can stay viable under such tough conditions, it will put their firms at the table for Series B rounds later when the economy improves.

The emphasis here is that founders will be hesitant to admit to investors that things likely do not look rosy and that they will likely need flat and down intermediary rounds to provide for longer runways. The founders who do not ask their investors for these bridge rounds, if they are needed, are less likely to receive bridge rounds later and thus less likely to remain viable through the current economic mess.