Federico Vega, Adjusting to the current environment | Frete
Speakers: Nathan Lustig, Magma & Federico Vega, Frete
Key lessons learned from Federico’s experience building Frete:
On adjusting to the current environment:
- “If companies like Microsoft & Amazon are cutting so many people, why shouldn't a company like Frete do the same?”
- Frete cut 40% of the entire burn rate of the company even though Frete had plenty of runway
- Even after these cuts, the company is growing more quickly.
On understanding the VC game:
“First learn the rules of the game, then play the game better than anyone else”
- In 2021 Fede noticed for Frete’s industry, investor’s didn’t care much about monetization in order to raise money, they needed to grow 50-60% per year.
- Frete actively avoided growing faster than 60% because they knew markets wouldn't reward them for it, and Fretewould spend more money and have worse unit economics if they grew faster.
- Frete raised $200mm USD even though they didn’t need the money. They were able to get a lot of money on good terms and a good valuation, so they took it, knowing fundraising wasn't going to get easier in the future.
General advice for founders in current market conditions:
What are investors expecting?
- Survival is a precondition of growth
- "Any business model that doesn't scale profitably, meaning it has negative gross profits, needs to rethink how to make money"
- Growing 2x this year might be more impressive than growing 3-3.5x last year.
- Investors aren't expecting really high growth rates this year. It might be smarter to grow 40-50% but improve unit economics and burn multiple.
- In general, investors want to see: good unit economics, good burn multiples, and a plan to have at least 18-24 months of runway.
On weathering the storm:
- 2020 and part of 2021 were the exception, don’t expect the market to go back to that
- Companies with short runway (less than 18 months), should stay protected until the storm passes. When there is a signal that interest rates will be more stable in the US, then you can start to think about burning more on growth.
- If you have under 1 year of money left, ask your current cap table if they’d invest more money into the company, and at what valuation. It’s good to have this information ASAP.
- Remember, survival is the precondition for growth
On understanding macro:
- You can’t be a good CEO in this environment if you don’t understand macroeconomics & corporate finance.
- If you are building your startup in South America, what happens in Brazil is very important. No one knows how the new government will affect markets, or external shocks that nobody controls.
- LPs and investors are getting concerned about currency risk in Mexico and Brazil more than in previous years.
Beware of investor advice:
- Even if you are on the same team, risk-reward profiles are really different for founders and investors.
- Investors only need one big success in 50 to be successful. Founders have one company only. Investors have 50 shots on goal per fund, founders have just 1.
- Some investors will pressure for more growth, knowing that overall success % of the company goes down, but the size of the outcome if successful increases. Understand that incentives are different for both founders and investors.
- It’s better to build a $50M company than an underwater unicorn, and it can be better for founders to build a smaller company with less dilution than even a company that’s 10x bigger but requires much more capital.
Better to cut early than late:
Here is an example why:
- Say you have 12 months of runway and are burning 100k/month. If you cut 8k of burn/month today, you’ll save yourself a month of runway.
- If you want to extend your runway by a month with only 6 months of runway, you’ll have to cut 2x as much burn.
The same applies for cash management: putting extra cash in the bank today will prove much more effective than doing so in a few months. The effect is two-fold – you’ll have more months to generate interests on your cash + more cash to start with.
We’re not very optimistic about the rest of 2023. The VC "Dry powder" spoken about might actually be "wet powder," meaning a lot of that money is already dedicated to putting money into existing portco's
Banks are now paying interest on your spare cash. There are really safe options that can yield as much as 4,7%.