General Housekeeping

Welcome to our first regular edition of Noted! As a reminder, or if you are new here, Noted is a collaborative venture, startup, and tech publication featuring 8 young venture investors and operators. Each piece we publish will feature an anchor author (anchor authors will be more experienced investors, operators, and thought leaders in venture and tech), who will begin with a thought piece of their own. The rest of the piece will be a collection of further analysis, discussion, and commentary from the several of the Noted team members.

^{A Quick Note RE: The /SVB Banking Crisis}

Featuring Ben Grosse from Tribeca Venture Partners / Noted

Before we get into the piece, the Noted team would like to take a moment to address the SVB situation and the continued stress in the banking sector. Earlier this month, a run on Silicon Valley Bank (“SVB”) threatened the livelihood of thousands of companies and their employees. Even for those who have worked through ‘08 during the financial collapse and last major bank run, the collapse of SVB was an unprecedented event in many ways given the speed and role social media played. While many partners were frantically trying to help portfolio companies, many young investors and operators were stuck refreshing Twitter, blowing up group chats, and wondering whether this industry would be completely leveled in the next week.

The Noted team does not pretend to have a full perspective on what happened, partially because our professional careers have been set in the backdrop of a bull market fueled by low or zero interest environments, and especially because this situation is still unfolding and likely will be for months to come. What is more important is for us to learn from what happened and fully digest those lessons. In Baupost Group founder Seth Klarman’s 2010 annual letter, he included a list of The Forgotten Lessons of 2008. While this situation is markedly different from what happened in 2008, the concept of “never learning, or quickly forgetting, the lessons learned during a particularly trying time” is now more salient than ever. I highly recommend giving it a read as the most important thing we can do is not debate the crisis, but instead, fully internalize the multitude of mistakes that were made over the past several years and chart a path forward where we never fall back into the poor habits and patterns of the past.

To fully comprehend the set of factors, actions, and tailwinds that led to this disaster we assembled these resources that we have found to be the most helpful to understand the causes and potential downstream effects of this collapse.

• SVB Couldn’t Ignore Losses But the Fed Can

• Why Was There a Run on Silicon Valley

• The Final Breaths of Silicon Valley Bank

• Who Killed Silicon Valley Bank

Introducing Matt, the Founder and President of 25madison

Matt Fremont-Smith is a founder and President of 25madison. He spent 30 years at Goldman Sachs in multiple roles, including advising early stage companies and as the COO of Asia Pacific and of GS Bank.

25madison is a NYC-based venture platform. We partner with entrepreneurs from the earliest stages to build breakout businesses at our Studio, and we invest in Seed to Series A opportunities from our venture fund. The 25madison venture platform is comprised of four entities:

• Studio: Where we incubate and build new companies from scratch (pre-Seed)

• Ventures: Where we invest in early-stages businesses (Seed; Series A)

• Health: Where we build and invest in early-stage healthcare startups in partnership with LifePoint Health

• Create: Where the 25m creative team takes on brand experience and design projects

Leveraging brand experience and collaboration, our accomplished team partners with entrepreneurs and turns their high-conviction ideas into big businesses. Our venture studio model excels because of our resources, network, capital, and a proven process that supports entrepreneurs, allowing them to focus on what they do best – building companies.

Matt’s perspective on the market today

While we are currently experiencing a soft market, it has not yet proven to be a downturn. We haven't had an inflationary shock since the 80s, and the global financial crisis (2009-10) was a sharp downturn that corrected quickly - and we’ve had a hot period since then, driven by massive government stimulus which is only now being curtailed. Recent memory has yet to see a sharp, sustained downturn. We aren’t out of the woods yet and the major risk factors remain the same - war in Europe, crisis in the Middle East, conflict with China, economic issues in the Eurozone, and the pressures of rising inflation. Allocators are likely to be cautious while the current transition period plays out.

What measures can early stage operators take with the state of the market in mind?

• Reduce burn rate: Be ruthless about dollars out the door. Think through burn reduction so that short term decision-making does not inhibit long term growth.

  • Prioritize aggressively: know your key market insight and only pursue initiatives that directly support its development.

  • Reassess the different channels in your funnel and consider eliminating the ones that do not have the best CAC:LTV.

• Accelerate speed to product-market fit: Reassess the core insight of your product and be honest about your traction.

  • Run faster product tests without a great deal of investment. Do not over-invest in testing until you believe you have reached product-market fit.

• Consider talent: Be opportunistic when it comes to talent.

  • Take advantage of the fact that high quality talent from later stage companies is flooding the market as a result of market disruption.

• Leverage mentors, advisors, and investors: Take the time to schedule meetings with your mentors, advisors, and investors, all of whom have an interest in seeing you succeed.

Take advantage of the resources that you already have access to. People are happier to help than we expect.

How is the state of the market informing how we view early stage investing?

• Early stage companies are less affected than growth stage deals:

  • While expectations for seed stage businesses have shifted, valuations have been materially reduced by ~40% in Series A/B rounds. Valuations are only just softening in seed.

• The investment cycle is taking longer:

  • Investors have slowed down in terms of allocating capital and are taking more time to do diligence.

Advice for Early Stage Operators from an Early Stage Operator

Featuring Tyler Lasicki from Noted / Coasters

On how to be scrappy:

Being resourceful and scrappy is pivotal for any early stage startup, but in a downturn market it becomes a universal requirement. Doing the things that don’t scale earlier rather than later lets you quickly build low cost traction and/or conduct tests that fail quickly with minimal investment. As Matt alluded to, over-allocation to incomplete, pre-product market fit products can fundamentally cash strap startups early on and divert priorities.

On how to prioritize: 

Just as identifying high potential initiatives and doubling down on them is important, identifying low potential initiatives and killing them quickly can be as important, if not more so in today's market. In a time where minimizing burn and expanding runway is of the utmost importance, pulling the plug on unsuccessful projects creates the opportunity to reallocate key resources to other areas of the business. As an operator, it can be easy to fall into a decision making dynamic that over indexes on sunk costs. Being conscious of this and adjusting priorities accordingly can be the difference between runway extension or depletion.

On how to generate revenue:

Building and expanding revenue streams should still be a top initiative for all startups operating in today’s environment (along with optimizing for profitability). A scrappy form of revenue expansion can come by way of applying new use cases to existing products, thus enabling sales teams to cast wider nets for top of funnel leads. From a cash utilization perspective, creating business applications from existing products is far more efficient than building entirely new business units from scratch. On the revenue generation front, earlier stage companies that are not currently monetizing their products, should be focused on shipping a minimal viable monetizable product (MVMP). Starting to shift gears into sales mode should be a top priority going into Q2 of 2023.

Successful Ways for Startups to “Weather the Storm”

Featuring Luke Aschenbrand from Newchip / Noted

Having worked with 300+ founders working on companies in a breadth of sectors, I’ve come to identify four core elements shared by successful founders operating in downturn markets.

1. Making decisions around demand through data

Founders who don’t prioritize and leverage data will never fully understand the mechanisms that could catapult their businesses to product-market-fit (PMF), an ever-evolving term. Market conditions are dynamic in the same way as PMF, and companies need to take actionable insights from their data on customer spend, usage, pricing, acquisition, positioning, and more in order to achieve PMF.

2. Prioritizing their operations to cater to their ideal customer persona

In an expansionary economic environment, founders can have the privilege of building a product or service before having a clear understanding of who they are selling to; however in a downturn economic environment, founders are not privy to that same luxury. Founders not only need to understand who their ideal persona is, but also need to incorporate a higher level of precision, planning, and diligence into their overall operations to cater to this ideal persona.

3. Being creative and cost efficient when it comes to finding new customer acquisition channels

Customer acquisition has arguably been one of the easier parts of company building over the past two years– the cheap cost and “never-ending” supply of capital meant that companies could spend “at will” to buy customers. These times are long gone, and we are already seeing the unraveling of companies that threw money at acquiring customers, rather than diligently finding the correct mix of strategies that protected the bottom line while fueling top line growth. Being strategic and creative about how you engage these customer prospects can be the difference between failing and thriving in a down market. If you’re an early-stage founder, don’t be afraid to pick the phone up yourself.

4. Focusing on maintaining high levels of customer retention and reducing burn

While customer acquisition motion is clearly a key component of operations, much can also be said about the role of retention and churn. One of the key questions that is now being asked isn’t “can they maintain or increase the pace at which they were growing,” but rather “how much of their current growth and revenue can they maintain amidst spending pullbacks.” Quality of revenue as well as net dollar retention are two of the best indicators of a company's current and future, both of which are intertwined with churn and retention.

Final Thoughts

As always, please reach out to our team ([email protected]) with any questions, comments, or feedback – we’re open to it all!

A huge thank you to Matt Fremont-Smith and Lily Rogath from 25madison for sharing your thoughts with our team this week. In an effort to support our community of founders during this difficult time, we have partnered with our friends at 25madison to help answer any questions that may be top of mind right now. Founders, please reach out to us ([email protected]), and we’ll help get your burning questions answered.

We’re looking forward to keeping the momentum going with Noted. Thank you for reading!