The Watney Rule

In February of 2016, Mitch Kapor tweeted out “The Watney Rule for startups: Survival depends on achieving self-sufficiency.” This tweet was a focal point in the Q1 2016 quarterly letter sent out by First Round Capital encouraging founders to not overly rely on follow-on financing.  By achieving some measure of self-sufficiency, founders and companies can wait out periods of market uncertainty to realize a more lucrative liquidity event.  If outside capital does dry up and follow-on investing slows, startups may find themselves at the mercy of buyers who are not in the mood or position to pay top dollar. In fact, startups may already be beginning to see the doors closing as capital markets are sending mixed signals about exit scenarios.

Two signals worth noting of late in this regard are corporate debt levels and IPO market activity in the US, as both are good indicators of a startup’s ability to achieve an exit.  In April 2017, the IMF put out a report stating that debt servicing as a proportion of income has risen to its highest level since 2010, indicating that businesses are taking on more debt but investing in lower performing assets. Though this may not seem important today, it could indicate that the balance sheets of corporations are stretched and might indicate an inability for companies to make strategic investments in businesses where the unit economics are still unproven. The other warning signal recently comes from the IPO market, as the shares of unicorns Snapchat and Blue Apron have both struggled since their IPOs. Neither company operates at breakeven. In addition, it is not lost on anyone who invests for a living that the current bull market is entering its 100th month, making it the second longest on record.

There are currently 163 companies listed in the WSJ Billion Dollar Startup Club with a combined valuation of $620B. Time will tell as to the fate of these 163 companies, but each of them should consider that in order to substantiate their valuation they will need to ultimately find an exit.  Like Mark Watney in The Martian, all founders should strive for self-sufficiency as quickly as possible.

Posted on July 13, 2017 in Angel Investing, Economy, Investing, Perspectives, Silicon Alley, Startups, Venture Capital

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