Category
- Opinions on the bass
Written by
Karl Shin (CEO)
Date
Empty
The external environment of a business is always changing. And the degree and direction of that change are external variables that startups cannot control. Words like market slump and recession that have been mentioned a lot recently seem to be becoming a reality for many startups. The text below is what we sent to our base portfolio members at the end of June, sharing the background/impact/response/outlook on the recent situation. We are sharing the original text as is to convey our thoughts on the current situation and how we intend to work with our portfolio companies.
This email is addressed to key personnel from our base portfolio companies.
You may have heard a lot of talk recently about how the market will become very difficult, so I am writing this email to tell you how this can affect our startups. This is something we have been telling you individually when we meet with investors recently, but I think it will help you to have a sense of reality and deal with the current situation wisely by directly conveying our voices working in the VC capital market. Even if you already know the information, I would appreciate it if you read it once.
Background: The Structure of VC Capital Markets and the Root Causes of Shrinkage
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Ultimately, the most common way for our startup to raise capital through investment is to attract funds from funds managed by VCs.
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However, if you look at the composition of this “fund,” it is ultimately made up of so-called investments from places that manage large amounts of capital (commonly referred to as LPs). Representative examples of these LPs include the National Pension Service, various mutual aid associations, banks, and private companies.
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However, all of these capitals ultimately compare the returns on their investments. Simply put, in a situation where interest rates are rising like these days, the appeal of investing in VC funds is bound to drop sharply .
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In addition, they often participate in fund products by raising capital, but since the “funding interest rate” itself rises, smooth fund execution is not possible.
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At the same time, these capitals do not only invest in VC funds, but also diversify their investments or investments into various portfolios (listed stocks, bonds, etc.). Many say that the proportion of portfolios investing in VC funds has increased significantly in the past year or two due to the startup boom and government policies.
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In conclusion, simply put, LP funds are likely to be blocked first / VC fund formation is likely to be delayed or difficult / and VCs are likely to have a stronger need to use their existing funds as efficiently (i.e. sparingly) as possible .
Status: So what are VCs actually doing these days?
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However, it is true that large funds or funds formed in the past year or two are still valid. It is also true that many domestic VCs have to use up this money within a certain period of time.
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However, there is absolutely no reason why the investment exhaustion should be 'now'. The possibility of valuation going down as time goes by is much higher than the possibility of going up. It is not 'not investing', but 'this is an opportunity to invest cheaply' .
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The recent sharp decline in the IPO market also has a significant impact on VCs’ investment decisions. To put it very practically, when calculating the corporate value that serves as the basis for investment decisions, most VCs compare the valuation of similar listed companies with so-called peers. However, if the corporate value of the similar listed company is low, then it is naturally difficult to make decisions.
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From this perspective, it is highly likely that funding will be approached extremely conservatively, especially at valuations of 40 to 50 billion won or more based on corporate value. In other words, it is highly likely that rounds after Series B will be very tight. This is because the future corporate value that can be expected through investment (i.e., the corporate value of similar industry listed companies or unicorn companies) has decreased.
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Some of you may already be experiencing this, but most investment firms that primarily invest in Series B or higher Growth stages are either halting their investment activities or operating them in a limited manner. It is a difficult situation, but there is a high probability that this will continue for some time.
To-Do: What We Should and Should Not Do Now
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First of all, if the target is a company that is in the process of funding or preparing to fund, you should be careful about the following actions.
. An act of believing someone's intention to invest verbally one or two months ago.
. We believe that the VCs who showed interest in the past will still be interested in us at a similar temperature.
. Focusing too much on specific valuation numbers, such as trying to apply the valuation that similar companies received at the beginning of this year to our current funding.
. A method of planning and operating a runway based on the assumption that funding will arrive in the second half of this year/early next year.
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In contrast, here's what you need to do now:
. Check whether a loan is possible, including securing a loan guarantee from a public institution such as the Technology Guarantee Fund or the Credit Guarantee Fund.
. A realistic assessment of the BEP timing and recognition that in some cases it may need to be brought forward as much as possible.
. Establishing financial plans based on the assumption that the current recession may last for 2-3 years
. While thinking about whether we should do something more in business, we also think about what the core of our business is that we must keep even if we have to throw everything away.
Looking ahead: Now is the time.
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I've only told you so many depressing stories, but there's actually another idea that VCs have right now. If you survive in this market, the rewards will be huge. Most VCs know this from experience.
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That's actually true. If we are in a difficult situation, our competitors will be the same, and in extreme cases, there will be competitors who will have difficulty doing business anymore. (Of course, it could be us ㅠㅠ)
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Hopefully, if you get through this period wisely, it can be an opportunity to become a winner in the market. However, there may be difficulties during the process, so please talk to our base whenever you need to. (Especially, if you need funding or have concerns about the runway, you should talk to us as soon as possible.)
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Finally, although it may be a bit of a footnote, I would like to add an article translated by one of our company's reviewers. (It was published in a webzine run by our reviewer.)
This is an article written by Paul Graham, better known as Y-Combinator, in 2008, when the subprime crisis was at its peak. It is already 10 years old, but I think it is worth reading.
There probably weren't any easy moments while running a business. In such times, I think it would be good to discuss and resolve them with a partner who shares the same interests (I would like to refer to you as BASS Ventures^^).
Please feel free to contact me anytime.
Thank you
Shin Yoon-ho Dream
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