Managing Risk for Tech Companies and Developers in Light of SVB

Great advice from Ross Chaldecotte of Kinde - talking ways to manage risk for startups and tech companies looking to scale…..

Thankfully it looks like Silicon Valley Bank (SVB) customers will retain all of their funds. Kinde was never directly impacted as we bank in Australia with one of the big 4 banks and utilize Airwallex for our international transactions. It did, however, make us painfully aware of the risks of keeping all of our eggs in one basket (not just around banking).

Here are some of the approaches we’re applying to help distribute risk and protect our customers and team (most of these are already in place):

* Always have at least 2 bank accounts and distribute funds between them so that there is never a central point of failure. Make sure that banks used are truly different entities and are federally guaranteed. Ideally cap account limits to insured limits – but this seems an unlikely / impossible scenario with large amounts of funds.

* Make sure we have up to date records of balances and statements to prove balances should we need them.

* Make regular backups of our critical software systems so that if any one point fails we can roll to a secondary as fast as possible with minimal loss. We looked at the scenario where a third party like Xero or Stripe got taken down by SVB failure and realized the knock-on effects could be quite large.

* Build redundancy into everything that we develop. We build with a rule of 2. Which means that every integration we use should be deliberately built with a minimum of 2 vendors in mind. For example, if we use Stripe, we will also build for Adyen or Worldpay. This is better for our customers as they gain choice and can use their preferred vendor, but it’s also better for us, as it doesn’t lock us in and protects us from catastrophic failure.

* A complete AWS failure seems highly unlikely and if it occurs would be a catastrophic event far larger than Kinde. Most of the world would be reeling and the majority of customers we work with would also be hit directly. In the event that service here did not return, standard best practice would apply. Code is stored in both github and locally, and database backups are made regularly. We would be able to have Kinde back up and running fairly quickly on an alternative like Google Cloud. Assuming the zombies hadn’t eaten us all by then.

* To protect our own customers, we continue to have strongly defined business continuity plans and our software in escrow to ensure we are protecting our customers in the event of our own failure.

We’re still working through it and I’m sure there are other things we will encounter along the way.

It would be interesting to know what others are doing that I’ve missed. Feel free to post in the comments.

#svb #siliconvalleybank #riskmanagement #risk #redundancy #software #banks 

Mark Gustowski talks about the importance of cash and reducing burn

To say that the current capital markets are challenging would be an understatement. 

The tech ecosystem has come out of what can only be described as enormous orchestrated bubble, fuelled by 

• endless printing of money during the pandemic, that ultimately led to 
• high inflation, 
• interest rate hikes, and 
• massive job shedding.

Could it have been avoided with foresight and measured fiscal policy? Sure but let’s not let a good fiscal management in the way of government elected terms. 

But what does this mean for our startup sector? Well if you raised during the bubble well done, hopefully you raised enough to give you another 24-30 mths of runway. If you didn’t, and you find yourself going to the well again in the next 12 months, be prepared for down-rounds. Valuations have dropped, from Meta and Stipe through to startups.

Is it all bad? Not necessarily, it’s a normalisation of the market and valuations but I do worry about the 2021 and 2022 investment vintages, returns are going to be a real challenge for them.

Cash is king 

So what now? What do VCs like Mandalay Venture Partners look for in a deal? Well for starters you better be sure to be raising for 18 months or more, preferably 24 to see you through the current period. 

Austerity means slowing growth, managing burn and understanding the all important ‘burn multiple’. 

Growth for growth sake is no longer the metric, it’s now efficiency of growth that will make you stand out. 

If you’re a founder you best get your head around the concept of ‘burn multiple’ really fast. Investors will be looking at your spend (burn) vs your revenue and doing back-of-the-napkin assessments to ascertain how sustainable your business is going to be. 

https://bsivc.blogspot.com/2023/03/david-sacks-burn-multiple.html

the Burn Multiple - the inverted Bessemer ratio shared by David Sacks 

Burn Multiple = Net Burn / Net New ARR

In other words, how much is the startup burning in order to generate each incremental dollar of ARR?

The higher the Burn Multiple, the more the startup is burning to achieve each unit of growth. 

The lower the Burn Multiple, the more efficient the growth is.

For venture-stage startups, these are reasonably good rules of thumb

So when raising Seed to Series-A and beyond, consider the following:

👍🏼18 months runway is ok, 24 months is better 

👍🏼cap salaries and remunerate via ESOPs that can reduce burn 

👍🏼if new markets are exceeding a burn multiple of 3-4, reconsider for now

👍🏼managed growth is ok, cash is king

👍🏼mark to market regularly 

This is not the environment you want to be raising in twice in the same 18 months. Money is going to get tighter as interest rates continue to rise to curb inflation. It’s going to be hard to attract dry powder as venture returns become less attractive with other capital allocation assets. 

Learn about the concept of burn multiples in austere times (see attached article). Great opportunities will still be funded but we are no longer in a ‘blitz-scale’ era; your growth and market strategies need to reflect that. 

A good investor will help navigate these waters. We don’t expect founders to understand all the underlying macro economic issues, but it is our role to help you chart a sustainable path forward. 

Don’t be afraid to ask questions, test assumptions or reach out as it’s the best way for us to get through this together. 

#startup #capitalmarkets  #tech #investment #venturecapital #venture

https://www.linkedin.com/posts/mgustowski_the-burn-multiple-activity-7043569756246851584-Kcpk?utm_source=share&utm_medium=member_ios

David Sacks - the burn multiple

David Sacks of PayPal, Twitter and All in game talks about a burn multiple

Two simple ways to measure capital efficiency are the Hype Ratio and Bessemer’s Efficiency Score:

1. Hype Ratio = Capital Raised (or Burned) / ARR
2. Efficiency Score = Net New ARR / Net Burn

David  think Bessemer has the right idea but prefers to flip the numerator and denominator, so the ratio is an annualized version of the Hype Ratio. 

He  calls this the Burn Multiple:

Burn Multiple = Net Burn / Net New ARR

In other words, how much is the startup burning in order to generate each incremental dollar of ARR?

The higher the Burn Multiple, the more the startup is burning to achieve each unit of growth. 

The lower the Burn Multiple, the more efficient the growth is.

For venture-stage startups, these are reasonably good rules of thumb:

For example, Q1 just ended and it’s time for a board meeting. The startup reports that it burned $2M in the quarter while adding $1M to its ARR. That’s a 2x Burn Multiple — reasonable for an early-stage startup. On the other hand, if the company burned $5M in Q1 to add $1M of net new ARR, that’s a terrible Burn Multiple (5x). It should probably cut costs immediately. That company is spending like a later-stage company without delivering later-stage growth.

Too many startups report their growth without contextualizing it as a function of investment. If extraordinary investment (3x burn or more) is required to deliver that growth, it’s an indicator that product-market fit isn’t quite what it appears to be or there’s some other problem in the business

These are some of the things that can affect the burn multiple and your business

For example:

• A gross margin problem — If the company spends too much on COGS in order to deliver the product or service, its burn will increase rapidly as it scales. If there’s not operating leverage in the business, the Burn Multiple will not improve with scale.
• A sales efficiency problem — If CAC is prohibitive or sales productivity is diminishing, burn will increase relative to new ARR, causing the Burn Multiple to worsen even though growth continues.
• A churn problem — Churn will net against the denominator of the Burn Multiple, causing the multiple to increase. A leaky bucket makes it hard to grow efficiently.
• A growth challenge — If growth is stalling, the company may seek to compensate by spending more on marketing, give-aways, discounts, or promotions. That will be picked up in a higher Burn Multiple, as burn rises faster than new sales.
• A founder leadership problem — If the founder lacks the skill or will to control burn, that will show through in the Burn Multiple.

Burn Multiple by Stage

The Burn Multiple should improve as the startup matures. 

For example, a seed stage company might have a Burn Multiple of 3 because it just started selling. After the Series A, it might drop to 2. After the Series B, when the sales team should be operating at scale, the expectations for efficiency increase even more. 

Eventually, for a company to become profitable, burn must reach 0, which implies that the Burn Multiple should also approach 0 over time.

If the Burn Multiple is going in the wrong direction as the startup matures, that’s a indicator that something is wrong, even though headline growth might still be increasing in nominal terms.

What Founders Can Do

1. they should keep salaries and expenses low in the early days — 

2. strengthen the impression of product-market fit for when they go out to raise a venture round.

3. cut costs, the Burn Multiple doesn’t care about sunk costs and always gives founders the chance to improve.

4. It be worth giving up some revenue (e.g. unprofitable growth) if it brings the Burn Multiple down to a much healthier ratio.

It’s not just about growth  but the efficiency of growth .

It’s an indicator that incremental spend is working 

As everyone in the startup ecosystem scrutinizes their runway and makes tough decisions about how to extend it, the Burn Multiple is a useful rule of thumb for founders and investors alike to keep in mind

cash is king and queen - Allen Pathmarajah and Alan Miltz 

https://bsivc.blogspot.com/2023/03/mark-gustowski-talks-about-importance.html

https://sacks.substack.com/p/the-burn-multiple-51a7e43cb200

https://www.wallstreetprep.com/knowledge/burn-multiple/

How to become a centre of influence and build a business plan

 Billy Connolly talking business planning and what people said about Ivan Kaye's talk on "becoming a centre of influence" about how to become a centre of influence 

Canva quietly passing 100 million users

Democratising Art with RedBubble - a dream that Martin Hosking turned to action

20 years ago Martin hosting offered us a chance to invest in an idea to bdemocratize art and photography - connecting artists with a global audience and providing a hassle-free way to monetize that art.

Redbubble is now a global online marketplace that allows independent artists, designers, and creators to sell their artwork on a wide range of products such as t-shirts, phone cases, stickers, and home decor items 

With a turnover of 109s of mikkkions of dollars

The platform has become a powerful tool for creatives to monetize their art and reach a wider audience.

How does it work ?

One of the biggest advantages of Redbubble is the ease of use for both sellers and buyers. For sellers, it's a simple and free process to upload designs and choose which products to feature them on. The platform takes care of production, shipping, and customer service, making it a hassle-free way to sell art. For buyers, Redbubble offers a wide variety of unique and original designs, making it easy to find something that suits their personal style.

Redbubble offers a flexible revenue-sharing model that allows artists to set their own prices and earn a percentage of each sale. This means that artists can earn a steady income from their art without having to worry about the logistics of production and shipping.

Global Reach

Another key advantage of Redbubble is its global reach. With millions of users from all over the world, artists have the potential to reach a much larger audience than they would through traditional methods of selling art. The platform also offers a range of marketing tools, such as email marketing and social media promotion, to help artists increase their exposure and sales.

Martin’s vision of enabling independent creators to compete with established brands and reach new heights of success has democratized the art market