The market environment has changed rapidly in the last year, forcing startups to re-evaluate their strategies and become more cash efficient. But market changes have also opened up new opportunities for startups to pursue different growth models.
Watch the full conversation to hear Goldberg and Valentine’s insights on the current state of the market—and their advice for founders and operators navigating the startup landscape in 2023.
Michelle Valentine: Mark, you’ve been a partner at Index Ventures for a long time now. You’ve had a front-row seat to startups and watching the market change, and now’s a really strange and weird time. What is happening in the markets today?
Mark Goldberg: I’ve been doing this for seven and a half years, and this is an environment like I’ve never been in before. We’re at a point in the cycle where we went from “grow at all costs” mode to a real focus on quality and durability.
It’s amazing how fast the pendulum has swung from one extreme to the total other side of it, and it makes it really fun and exciting to be an investor right now.
MV: I remember you gave me the advice—and so did many other investors back in March or April of 2022—that you’d need 36 months of runway as the market started to change.
Now, in January 2023, I feel like people are saying the same thing and that maybe that 36 months wasn’t quite enough. Why are we still in this? What’s going on?
MG: It’s not that it wasn’t quite enough, it’s just—you now also need 36 months. So every month you’re going to need 36 months of burn.
No, I think that we’re all trying to figure out the new landscape, and the reality is most companies don’t want to go fundraise in this environment. And so when we say 36 months as a VC, it’s not necessarily precisely 35 or 37 months. The idea is you probably wanna avoid fundraising in the next 12 months if you can.
Now I think that when you go to market for a fundraise, you also probably want more than a year of cash so that you really can control your destiny and don’t feel like you’ve given up leverage in that process. And what does that mean? You need to think carefully about how you’re spending and controlling burn.
My sense is I’m just continuing to see great founders operate in this environment. And I think what this environment is forcing is: People that are really good are getting challenged in a way that’s making them better.
Or we’re realizing that some of the companies and some of the teams that started maybe didn’t have an idea that was as strong as they thought, and that’s okay. We’re going to see a shakeout that will ultimately make the entire industry stronger and more resilient.
MV: Yes, I definitely feel, as a founder, I’ve been challenged in a different kind of way and it’s something that I’m hearing from other folks in my cohort about how they’re thinking about fundraising differently, and thinking about company-building differently.
For example, I’d say pre-market crash, the venture model was the default market model. You raise almost every year—some folks would raise twice in one year when the market was hot.
And now I’m hearing from founders that some companies are profitable and they want to continue growing that way instead of going after venture dollars. And if you do have the capital and you are pretty efficient, that’s great—to your point, control your own destiny, be able to continue pursuing growth, the VC model, but with perhaps a little bit more constraints.
MG: I think one of the really exciting things going on right now is that the well-trodden path that existed for businesses over the last 3, 4, 5 years no longer looks so obvious.
And while that’s probably intimidating, it also means that you can trail-blaze and do a lot of things that would’ve been seen as negative signals in the market in the last few years.
So if you decide to operate towards profitability, that probably wouldn’t have been looked on favorably in the climate of the bull market of 2021, 2020. Now, I think it’s a very valid choice that many companies are making, and I think we’re going to see the exciting breadth of decisions around how people decide to run their businesses now
One of the things that must be exciting for you as a founder, as an operator, is the fact that you’ve also been on the dark side of investing. So how did that previous experience inform some of the choices you’re making now as you guys are heading into a very different environment?
MV: Good question. I think the investor experience does make me a little bit more skeptical—or scrutinize every piece of fundraising advice that founders might receive.
There’s a lot of hype around how in 2020 to 2022, VCs raised a lot of money. There were multi-billion-dollar funds being raised, and that capital hasn’t necessarily been deployed yet. People are calling this “dry powder” and saying that in 2023, there might be a fundraising avalanche where, as a founder, it’s great. You can actually go out and fundraise despite the market environment being a little bit touch-and-go right now.
The investor experience made me skeptical. Does that “dry powder” actually exist? And I think it’s more complicated than it seems. I think about, okay, how do I make sure that Anrok is burning in a way that we can go fundraise when we want to fundraise and not have to rely on the market being good and trying to time it?