John Ruffalo, whom I have known and respected for a long time, recently penned a thoughtful piece that I think is worth sharing.
When contemplating the current valuation downdraft and potential upcoming recession, he sees the following implications for stakeholders of technology-based companies:
1.The markets have readjusted their valuation expectations to approach the long-term mean. Private market valuations will lag public company valuations by likely 6–9 months.
2.The markets are re-balancing their mix of expectations between growth and profitability, especially at the later stages of company maturity. The growth at all costs mantra will be replaced with a growth with profitability mantra. The profitability does not need to be immediate, but positive unit economics will be a must in the near term.
3.The expectations that companies can burn cash forever will disappear. There will be more focus on right-sizing costs of the organization to meet near-term revenue expectations.
4.The Canadian IPO window will be closed for at least the next 12–24 months except for those companies that are viewed as ready and high-quality. For example, for SaaS companies, the Rule of 40 (revenue growth percentage plus EBITDA percentage of revenues) will return as the minimum benchmark after largely disappearing starting in 2019. Companies with a smaller base of revenues or market cap will continue to struggle.
5.Acquisitions by foreign-based acquirers or buyout private equity funds will be on the rise again. Combined with a lower valuation compared to their peak values, expected decreases in liquidity of capital, especially on the Canadian exchanges and currency arbitrage will cause many of these companies to look “cheap” to potential acquirers.
He then goes on to lay out 10 things an entrepreneur needs to do to steer their company through the current and pending storm.
Remain calm
Ensure alignment with your investor stakeholders
Assess and keep a tight rein on your cash position
Ensure your business generates positive unit economics
Review opportunities to reduce your costs
Re-evaluate your organic growth strategies to ensure steady, sustainable growth.
Consider build vs buy vs partner strategies to achieve strategic objectives
Evaluate direct vs indirect sales channel strategies
Determine whether you have the right mix, quantity and quality of talent.
Don’t be a hero.
Worth reading the whole article, as he provides helpful context around these points.
