The VC's Playbook for Thriving in a Downturn: Empowering Your Portfolio Companies for Success

As we head into 2023, the global economy is facing a turbulent and uncertain landscape, with recession fears looming large. For venture capitalists (VCs) working with multiple portfolio companies, this presents a unique set of challenges.

But here's the thing: a downturn doesn't have to mean the end of the line for a start-up's growth. In fact, it can be an opportunity for savvy VCs to step up and provide critical support that can help their portfolio companies thrive, even in the face of adversity.

So now that the heady days of late 2020 to early 2022 seem behind us, when capital was sloshing around like a drunken sailor, how can VCs help their portfolio companies weather the storm?

As is always the case during times of turbulence, reverting to business basics can be a crucial step in mitigating risk and ensuring success.?

With that in mind, let's explore proven strategies for empowering your portfolio companies during tough times, drawing on our experience working with VCs and their portfolio companies.

Retain Top Talent By Focusing on Culture

One of the most significant risks your founders face right now is talent flight. When the world suddenly turns upside down, the natural reaction is to run. Without good people and high-performing teams in place, your companies will quickly unravel.

So while culture is a more intangible asset, it's just as important to focus on your portfolio companies' DNA as any other business metric.

Efforts (as they should be in both good times and bad) should be devoted to clearly defining and communicating each company's why. Top-performing employees need a reason to stay beyond the salary. It has to mean something more.

These culture-fostering activities are crucial for Millennial and Gen Z cohorts, who thrive when they feel they're contributing meaningfully to a mission or purpose they strongly believe in.

Research firm Gallup reports that Millennials are 4.5 times more likely to be engaged in their work when companies promote their purpose. And yet only 26% of Millennials say that they have heard someone talk about how their daily work connects with their organisation's mission and purpose in the past seven days.

So redouble efforts led by your founders to emphasise the company's unique mission statement to help build a more cohesive culture and a more positive working environment.

And while a company's culture may be difficult to quantify, time spent on promoting the company's mission isn't. So if your founders currently spend 10 hours across a month on promoting the company mission statement and culture-building activities, double it to 20 and reap the benefits.

Reduce Distractions for Founders and Help Them Focus on Just One or Two Priorities

When all kinds of headwinds impact your founders' companies, it's common for them to try to do too much to mitigate the perceived threats and risks.

However, this can backfire and cause founders to lose focus on what's most important. When there's turbulence and a macro and micro scale, the best approach is to boil down each company's objectives and key results (OKRs) into just a few key areas.

There should be no more than three overriding objectives and results. That's it. Distilling those down to one or two is even better.

What this activity does is both refocus founders and their team and helps filter out distractions. Even if several vital areas need addressing to reflect the new operating environment, by constantly referring back to one or two OKRs, founders can be more precise and less likely to get lost in the weeds.

Help Your Founders Get Inside the Mind of Their Customers

Remember, these macro conditions are affecting customers, not just your portfolio companies. The economic turbulence will influence everything from purchasing decision pathways to motivation and retention.

Thus, now is the time for your founders and their teams to perform a deep dive into what makes their end users tick. In all likelihood, what was true six to twelve months ago is no longer true today.

Therefore, one of the biggest opportunities available to portfolio companies is getting inside the mind of their customers today. Competitors failing to shift their focus to the customer's perspective can easily find themselves at a disadvantage in the future, so don't let this happen to your portfolio.

By helping your customers navigate their macro-climate-induced problems with tweaked products or services or even best-in-class customer service, you can create a virtuous circle of loyalty and success.????

As always, measure the impact of these activities through relevant metrics rather than just revenue growth (which can often conceal future problems), and hold each founder accountable for these results.

When Raising, Think Long-Term and Leave the Past Behind

Raising capital in 2023 is very different from raising capital in 2020 or 2021. The free money tree has dried up, and investors are more focused on returns given the higher interest rates from low-risk investment vehicles.

The current funding crunch is forcing companies to rethink how they raise and increase cash runway. The first point is to leave the past behind. It can be tempting for founders to look at what other companies raised less than 12 months ago and make misty-eyed assumptions about how much capital they can raise.

Even previous funding rounds may give founders false hope that they can raise more money in the short term. Egos must be left at the door here, and the focus should be on practicality and pragmatism. What do your portfolio companies actually need to achieve success?

Forget average seed round figures or those achieved by competitors. Founders should look closely at what their company needs, not what others are doing. Even if there's a hit to the valuation of your company, it's worth it to focus on what really matters to growth during turbulent economic periods: net burn rate and cash runway.

It's critical to think long-term here. Many are predicting this lull to be a two-year funding drought, meaning you need to be thinking in years, not months, when you're raising money.

Lastly, the reason realism and pragmatism is so vital right now is speed. As mentioned, distractions such as raising capital can quickly wear down a founder's focus. It's not the time to get fancy with funding terms or numbers. Get it done and get your founders back on track as quickly as possible.

Cut Costs to Preserve Cash Runway and Reduce Burn Rate – But Only Once

Finally, you need to address the elephant in the room. If you've not already, it's time to discuss cutting costs with founders. Layoffs are an unfortunate but inevitable part of the process when downturns hit.

But what differentiates successful start-ups is how they lay off their employees. The recent "layoff race" in the tech world has unveiled companies that have done it right (such as Zoom) and those that have got it so horribly wrong that the decline in fortunes may be permanent (Twitter's layoffs offer a perfect case study in how not to do it).

Of course, headcount is just one of several cost reduction areas available to you and your founders. There are plenty of opportunities to save money and extend cash runway in other areas of their businesses.

Average VCs add capital, great VCs add capital, and flex

Great VCs flex their buying power & bring down certain costs, such as SaaS subscriptions. Work with their portfolio to understand their burn rate.

Look at how you, as a VC, can step in and negotiate discounts on software such as CRM systems, rather than each company paying full price for their current suite of products and services.?

For instance, can you renegotiate server costs or arrange access to alpha and beta software releases of products not yet available to other companies??

By stepping in like this to leverage the buying power of your portfolio of companies, you can secure significant cost reductions on day-to-day expenses. Not only can you shave thousands off each company’s net burn rate, but you can help your portfolio gain a competitive advantage with exclusive vendor perks.?

Stimulating Growth in a Downturn Is Undoubtedly Challenging, But It's also a Priority

When a recession hits, start-ups are often the first to feel the pinch. While they're the ones trying to change the world and often the most innovative, they can also be the most vulnerable to the adverse effects of a downturn – namely because they need to keep growing.

The good news is that you can do several things to help your start-ups keep growing during a downturn. From eradicating distractions to conserving cash and instilling a focus on just one or two priorities, the strategies mentioned above are a few of the options available to you as you help your portfolio companies thrive during a challenging economic period.

At Ensemble, we help VCs streamline vendor costs by offering all software, tools, and other associated services under one roof. With our hassle-free vendor management platform for venture capital portfolios, you can save thousands off your monthly burn rates by consolidating all your vendor relationships into one location.

With steep discounts and exclusive perks negotiated for you, all contact management handled on your behalf, and best-in-class localised vendors, we're your one-stop shop for all your vendor needs.

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

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