Over the last couple of years, VCs were piled onto each other to throw money at mediocre companies with inflated valuations. I reflect on the risks of early-stage investing in 2022 as I see the falling knife of public tech stocks. I have come up with three risk factors that I need to feel comfortable with before investing.
1) Viability risk: Can this company be default alive with an absence of investor financing. In other words, does it have a revenue, margin, and retention base to get close to cash flow break-even at the end of my investment runway?
2) Valuation Risk: VC still does not agree on how to price earlier rounds due to late-stage and public markets multiples being depressed. I need to make sure that ownership is meaningful enough to combat multiple compression.
3) Customer Viability: Does your software or service serve a customer base that will have a contraction in a recessionary environment? Historical retention metrics need to be seriously tested with assumptions on market pullbacks.
It is a new world out there, and this is my new playbook.
