Adapting to a Changing Landscape: Insights for Venture Capitalists Looking to Maintain Portfolio Growth

2023 has ushered in a new era in the world of start-ups. A recessionary and inflationary climate has forced scarcity of capital, and founders used to interest rates of close to 1% must adapt their strategies to survive in the new world of 5% or more.

For your #venturecapital portfolio, now is the time to get more hands-on in your support role and offer advice to entrepreneurs and teams who've perhaps never found themselves in this situation before. Step up the #vcplatform leaders.

It's also a moment to step back and reassess your #venturecapitalportfolio strategy in light of this new economic climate.?

Growth at all costs has gone.?

Suddenly cash runways and net burn rates matter a lot more.

As a seasoned venture capitalist (#VC), you've likely been here before and known in the back of your mind that this day would come eventually. But how can you help these founders and leadership teams?

How can you take steps to ensure your entire portfolio doesn't just survive but thrives in this new world?

Revisit Your Metrics and Realign Them with Current Macroeconomic Trends

With the highest interest rates since 2008 and a challenging fundraising climate, you need to look at your portfolio metrics and realign them with the current macroeconomic trends.?

Whereas your 2020 and 2021 key performance indicators (KPIs) may have centred around daily or monthly active users (DAU/MAU), transaction volumes, and revenue per customer, you're going to need to update your KPIs for 2023 to focus on business fundamentals. Those that accurately depict your portfolio's health rather than vanity metrics.

Don't get us wrong; there's still a place for your customer acquisition cost to customer lifetime value (CAC/LTV) ratios and the like. Still, they only give a sense of the general trajectory of the business, not whether you're on a sustainable path.

There needs to be a step back to business basics. Profit margins, cash runway, net burn rate, and revenue-measuring metrics such as MRR or ARR are crucial at a time when capital is scarce and interest rates are high.

Just a few minutes spent on these fundamentals will tell you an awful lot about the health and long-term prospects of your portfolio of businesses.?

You can then step into the more complex metrics that make sense for the stage each company is at in its growth cycle, such as revenue per head and burn multiple.?

The latter is very much the metric du jour and measures the amount a start-up is currently spending to generate each incremental pound (or dollar) of ARR and is calculated:?

Net Annual Burn Rate ÷ Net New ARR

Burn multiples of less than 1x are superb, whereas those above 3x are bad and need urgent attention.?

The point is, while you would always expect your start-ups to spend more than they're taking in, the fundamentals matter right now, particularly regarding the balance between burn rate and cash runway.?

Why Now is the Time to Conserve Cash and Extend Runway

It's always prudent to be cautious when it comes to capital. But in the current economic climate, it's even more important to keep a close eye on your cash burn rate and extend the runway for your portfolio companies as long as possible.

The heady days of 2021 (in which VCs spent a record $643 billion) already seem a distant memory, and with capital availability continuing to be tight, you need to keep a close eye on the burn rate of your portfolio companies and ensure they're only spending what they can afford.

Extending runway is also crucial in the inflationary, recessionary, and risk-averse climate in which we find ourselves. Taking steps to develop a runway of at least 24 months is wise. On average, recessions tend to last 15 to 17 months, so anything over that can be considered safe.?

In the current circumstances, the old adage that you can't buy time is simply untrue. Time is actually the easiest commodity you can buy for you and your founder partners.?

It's how you do it that's the issue.?

You will have undoubtedly noticed that many VC-backed start-ups are making the tough decision to scale back on headcounts. In contrast, you might find that pursuing growth is the right call for some of your companies to bump up revenues and extend runway.

With that in mind, let's take you through some ways you can help your founders through this rapid growth to cash-conservation transition.

Strategies for Setting Up Your Portfolio for Success in a Post-Free-Money World

It's far from us to tell you what to do, but this period of macroeconomic uncertainty is the perfect time to consider how you will help your portfolio companies navigate this tricky period by reducing burn rate and increasing runway.?

Evaluate Leadership Teams

A company's success or failure often rests on its people. From entrepreneurs-in-residence to c-suite executives, you need to assess the current makeup of each company's leadership team and ensure they have what it takes to lead the business to success.

For instance, what happens if you're faced with a company leadership team that's never worked in these macroeconomic conditions before? Your experience may help them navigate these choppy waters.?

Your portfolio companies may also need support with hiring new senior talent who can guide them through the challenging economic waters ahead. Hiring those boasting extensive experience in extending runways and chopping unnecessary spending could prove invaluable.?

If you've built a strong network of experienced mentors and advisors, now is the time to leverage that network.?

Shift Focus to Existing Customers

With explosive growth no longer necessarily the primary objective, it's about focusing on what your portfolio companies already have – existing customers.?

Consumer sentiment is currently at its lowest level since the collapse of Lehman Brothers in 2008. What that means for your companies is a rocketing CAC that can seriously impact portfolio burn rate.?

The solution, therefore, is to look within.?

It costs up to seven times more to acquire a new customer than an existing one, and boosting customer retention by just 5% can increase profits by as much as 25%-95%. So guide your teams into focusing their sales efforts on already-established relationships.?

For SaaS and other subscription-based companies, churn should become a concentrated area of focus – both voluntary and involuntary.?

Look to better technological solutions for those who've involuntarily churned, and invest in customer retention campaigns (both automated and manual) for those who've left of their own accord.

Look at Innovative Ways to Increase Revenue

Of course, one solution to portfolio burn rate issues is increasing revenues to better offset negative cash flow. By boosting your income, you'll naturally slow down the rate at which you burn through your hard-earned working capital.?

Given the market conditions, now perhaps isn't the time for wholesale changes or pivots in your strategy. Instead, look for innovative angles to increase revenue generation, particularly through upselling and cross-selling existing products and services.?

Whether you can bundle a suite of a company's products and services together for a higher price or offer customers incentives to upgrade or renew their subscriptions, look for creative ways to boost revenue without increasing the cost of sales.??

Commit Time and Resources to Forecasting and Scenario Planning?

In uncertain macroeconomic conditions, things can change abruptly. Thus, it's vital that you and your teams keep a close eye on your forecasts and regularly tweak them as new information becomes available.

Scenario planning is equally important, particularly when considering potential outcomes and how to deal with them should they occur.?

For instance, what happens if one of your portfolio companies experiences a material decline in its monthly active users? What if their cost of customer acquisition doubles? What does that do to their burn rate and cash runway??

Remember, unlike a few years ago, raising extra capital is unlikely to be the answer if things start turning sour for one of your portfolio companies. So it would be best if you had other options prepped and ready to go.?

While it's never easy to predict the future, regular scenario planning exercises will help prepare your portfolio of companies for any eventuality.?

Conduct a Thorough Spending Audit

Lastly, if burn rates and runway lengths of some of your portfolio start-ups concern you, it's only natural to take a closer look at the spending practices of the companies themselves.?

By conducting a thorough audit of where the cash is going, you'll be able to identify any unnecessary spending that could be cut or streamlined to save money.?

While there will be obvious discretionary funds to cut (such as travel and entertaining costs), you may need to dig much deeper into your non-discretionary portfolio outflows to realise significant savings.?

For instance, can you reduce the number of servers your companies use? What about your list of portfolio vendors? Are these solutions genuinely offering value for money, or are they proving to be expensive anchors on your portfolio's performance? Are there discounts that can be negotiated for bringing so many users to the table at once??

By conducting a spending audit, you can identify what changes you can make to reduce your portfolio's burn rate, giving you greater levels of comfort that your portfolio companies are set up for long-term success.?

The Dawn of a New Era Shouldn't Spell the End of Your Portfolio's Success

The era of easily accessible capital is behind us. While that's not necessarily a bad thing, it does present some challenges for you as a VC looking after a portfolio of companies.?

The key is to stay calm, assess the situation, and develop innovative ways to help your portfolio companies navigate this tricky period without jeopardising their long-term prospects. The shift from growth at all costs to cash preservation and runway extension needn't spell the end for your portfolio's success – it just requires a different approach and a different set of skills.

At ensemble, we can offer a helping hand through our hassle-free vendor management platform for venture capital portfolios. We help your companies shave thousands off their monthly burn rate by offering exclusive vendor perks and discounts.?

Better still, with all your vendors pre-loaded into one #vcplatform, there's no longer a need to waste time on vendor spreadsheets or contact management. We do all the heavy lifting for you and allow your companies to grow faster by utilising our best-in-class (and often localised) start-up vendors.?

To learn more about how you can benefit from smarter vendor management for your #venturecapital portfolio, click here to book a demo.?