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The Only Certainty is Uncertainty
Mathematician John Allen Paulos’ famous saying was validated this month with the turmoil from Silicon Valley Bank (SVB) and the associated uncertainty that rippled through the tech world. Much has been tweeted, written, and even legislated about SVB. But in the rush to offer “hot takes” on banking, venture capital and government oversight, the most notable constituency minimized in the discussion has been emerging tech companies themselves. How will the fallout impact them? With funding in doubt for companies so dependent on outside financing, do they have a path to continued success? In uncertain times, how does an emerging tech company find success?
SVB has been the unofficial hub for all things venture
As the name implies, SVB has been the epicenter of the tech world in Silicon Valley and beyond. The company was, by far, the leading provider of banking services, working capital and venture debt to companies of all sizes. They were also a primary source of banking, financing and deal flow for venture firms, private equity funds and other investors. Above all, they were a trusted partner to the entire community. For the last four decades, the bank fostered a codependent network of investors and entrepreneurs, and its departure from the scene will surely have ramifications.
Access to capital has been relatively easy
For the last decade, as stable and low-interest rates drove economic growth and investment in VC funds, entrepreneurs enjoyed relatively easy access to funding. Investors competed to invest in the most desirable companies, valuations, terms and covenants were entrepreneur-friendly, and non-dilutive forms of debt were generally available.
The bad news is good times don’t last forever
All that changed in the last year, with the SVB news just the latest shoe to drop. Global supply chain and geopolitical disputes are driving economic uncertainty. Growth and profitability will be harder as economic headwinds dampen demand while increasing costs. Interest rates have risen. Equity is more expensive, with terms tightening and valuations already dropping and now likely to drop even more. Equity and debt will be constrained with investors and banks becoming more selective and less prone to taking risks with earlier-stage companies. Increasing regulation will cause even more risk aversion. Heavy cash burn to acquire customers and drive growth at all costs is quickly becoming a thing of the past. Unfortunately, not all emerging companies will have the mindset, culture and fortitude to adapt. And with capital harder to get, this could mean the end for some.
The good news is there’s a path to success in all this uncertainty
Companies that are capital efficient will thrive in this new environment. These companies know the payback on every dollar spent on development, sales and marketing. They know their ideal customer profile and unique value proposition. They are measured in their spending, think strategically about investments, and know the importance of a maniacal focus on the most important things that drive the most value at their company.
When these companies add fuel to an already working engine with additional debt-based growth capital, success is absolutely achievable even in the current environment.
During uncertain times:
Flexibility on payments, exit timelines, and covenants is especially necessary as waters are choppy and ups and downs may be magnified. When a company doesn’t quite know what’s going to happen, flexibility is key.
Operationally experienced, patient and empathetic partners who have calmly managed through previous market gyrations and know how to play the long game, can serve as the best advisors to entrepreneurs.
Non-dilutive options are even more valuable, especially in times of compressed equity valuations. If a company can use non-dilutive growth capital to accelerate through difficult times, it will emerge later at a scale and time when terms and valuations will be much more attractive, preserving financial upside for the entrepreneurs themselves and not the VC firms.
As others lean back, these companies leverage growth capital that only they are qualified to access to lean forward. It’s often said the best companies are born during downturns.
While a world with a diminished SVB will be difficult to navigate for emerging tech companies, there is a path to success for capital-efficient companies that find the right financial partner for these times. So while uncertainty may be certain, so can success.
Vince Hsieh
