Introduction:
David Sacks, an experienced Silicon Valley investor and co-founder of Kraft Ventures, presented on surviving a downturn. He provided insights into the current economic situation and its impact on stocks, particularly growth stocks.

Reasons for the Current Economic Situation:
The relationship between interest rates and inflation: The Federal Reserve (Fed) raises interest rates to control inflation. The recent surge in inflation and low-interest rates have caused a misalignment. The Fed’s efforts to raise rates to control inflation will impact stocks, especially growth stocks.

Impact on Stocks:
Growth stocks and long-term earnings are discounted more heavily at higher interest rates. The S&P 500 and the 10-year treasury yield move in opposite directions.

Stock Market Correction:
The recent stock market correction has been significant, with growth stocks experiencing declines of 60-90%. SaaS companies have seen a substantial drop in multiples.

Causes of the Correction:
The Fed and Congress’s response to COVID-19 involved printing money and reducing interest rates. This created an anomalous period of low interest rates and high valuations. The current correction represents a reversion to the historical mean.

Implications for Startups:
Unicorn valuations now require significantly higher revenue targets. The standards for unicorn status will become stricter.

Challenges in the Private Market:
VCs have deployed funds rapidly, leading to concerns about future availability. The correction in public valuations may impact VC fundraising and deployment.

Recent Trends:
Q1 2022 saw a 20% drop in VC funding, including in Series A rounds. The situation is expected to worsen in Q2 and Q3.

Scenario Planning for Uncertainties:
David Sacks highlights the challenges faced by VCs in the current economic climate, particularly due to reduced liquidity and a wait-and-see approach regarding price levels.

Three Possible Scenarios:
Sacks discusses three possible scenarios for the future: A short-term downturn similar to the COVID-19 crash in 2020, with a quick recovery. A longer recession lasting around 18 months, akin to the one experienced in 2008-2009. A severe “nuclear winter” scenario, resembling the dot-com crash of 2000-2003, where fundraising becomes extremely difficult.

Economic Indicators and Warning Signs:
Sacks emphasizes the importance of considering economic indicators, such as high consumer credit and housing prices comparable to pre-2007 levels, as potential warning signs for a recession.

Probability Assessment:
He suggests assigning probabilities to each scenario, with a one-third chance for each.

Survival Strategy:
Sacks recommends planning for at least a two-thirds chance of survival, ensuring coverage for the next 18 months. He emphasizes the need to be able to withstand a downturn or recession.

Historical Reference:
Sacks refers to past economic downturns and market crashes to illustrate the potential impact on venture capital and the economy.

Introduction: Lessons from Past Economic Downturns
David Sacks shares the story of “fuckcompany.com,” a website that tracked layoffs and business closures during the 2000-2001 dot-com crash, highlighting the sudden and severe impact of economic downturns on companies. He emphasizes the importance of understanding how capital markets can change rapidly, as seen in the boom of 1989 and the subsequent funding crunch of 2000.

Defining Default Alive and Default Investable Standards
Sacks introduces two standards for startups to consider during economic downturns: Default Alive: Assuming constant expenses and revenue growth, can a startup reach cashflow positivity with its remaining funds? Default Investable: Are a startup’s metrics strong enough to raise another funding round in the current environment?

Assessing Default Investable Metrics for SaaS Companies
For SaaS companies, Sacks defines metrics that indicate great, good, and danger zone performance: Great Metrics: 3x year-over-year growth in ARR, 70% gross margins, 140% net dollar retention, CAC payback of 6-12 months, and a burn multiple of 1 or less. Good Performance: 2.5x year-over-year growth, 50% gross margins, 120% net dollar retention, CAC payback of 12-18 months, and a burn multiple of 1-1.5. Danger Zone Metrics: Growth less than doubling year-over-year, gross margins negative or below 20%, net dollar retention below 100%, CAC payback over two years, and a burn multiple over two.

The Importance of Focusing on Danger Zone Metrics
Startups with danger zone metrics need to focus on fixing them immediately, as they can disqualify them from funding in a downturn. VCs become more discerning in a downturn, scrutinizing metrics beyond just growth.

Conclusion: Four States of OK in an Economic Downturn

Sacks summarizes the four acceptable states for startups during an economic downturn:
1. Castro Positive: Always good, indicating a positive cash flow.
2. Default Investable: Strong metrics that attract funding in the current environment.
3. Fixing Danger Zone Metrics: Actively working to improve weak metrics to make them investable.
4. Raising Money at All Costs: Securing funding despite weak metrics, but with the understanding that it may be dilutive.

The Four Options for Startups in a Downturn:
* Cashflow Positive: Having enough cash flow to operate without additional funding.
* Default Investable: Having the metrics to attract venture capital funding.
* Lean Startup: Having low burn, long runway, and iterating to product-market fit.
* No Man’s Land: Not meeting any of the above criteria.

Take Action Now:
* Top Off Funding: Secure additional funding if possible, even if it’s at a lower valuation.
* Adjust Runway: Aim for a runway of 30 months to give yourself enough time to fix business problems.
* Reduce Burn: Cut sales and marketing spend and freeze or reduce headcount.
* Act Fast: The sooner you take action, the more time you’ll have to recover.

Common Mistakes to Avoid:
* Assuming the Market Will Bounce Back: Interest rates are unlikely to return to zero.
* Dithering: Don’t delay taking action, or you may run out of time.
* Squeamishness: Don’t make small cuts. Instead, think from first principles to determine the right size of your startup.
* Sunk Cost Fallacy: Don’t avoid cutting because of past investments. Now is the best time to cut, as everyone else is doing it.
* Blaming VCs: Don’t blame VCs for your startup’s problems. Focus on taking action to survive.

Founding Companies in Downturns:
Several iconic Silicon Valley companies were founded or experienced significant growth during economic recessions. Examples include PayPal, Google, Amazon, Salesforce, Airbnb, and Stripe. These companies navigated challenges such as fewer competitors, reduced distractions, and less fundraising pressure.

Advantages of Starting a Business in a Downturn:
Reduced competition for funding, eliminating the need for unnatural business practices. Easier hiring process due to decreased competition for engineers and other talent. Decreased noise and distractions, allowing for a focus on core business fundamentals.

Challenges of Fundraising in a Downturn:
Fundraising becomes more challenging due to decreased investor appetite and risk aversion. Public company valuations have declined, leading to a decrease in venture capital funding. The graduation rate from seed to Series A funding rounds is impacted.

Advice for Entrepreneurs:
Focus on the fundamentals of the business, including product-market fit, customer acquisition, and revenue generation. Course-correct and position the company for successful fundraising when the market recovers. Avoid panic and maintain a long-term perspective, as economic downturns eventually pass.

Market Reset:
Current market conditions are leading to a valuation reset, bringing multiples back to pre-COVID levels.

Historical Comparison:
Series A deals pre-COVID typically involved $1 million ARR, $10 million raised, and a $40 million pre-money valuation. Series B deals pre-COVID typically involved $5 million ARR and a $100-$200 million valuation.

Current Trends:
Fast-growing SaaS companies like Snowflake can now be purchased at 8X ARR, compared to historical highs of 100X-200X ARR.

Down Round Considerations:
Companies with valuations that were too high relative to today’s market should consider their options. Waiting and seeing how far they can grow before raising capital is one approach. Resetting valuations now through a down round or structured round is another option.

Growth as a Solution:
As a private company, growing 3X year-over-year can allow a company to grow into its previous valuation within a year. Public companies experiencing a 70% valuation drop would take over a decade to recover with a 20% growth rate.

Growth and Valuation Considerations:
Public companies face challenges in growing into their valuations, while private companies can leverage growth opportunities. Startups that raised large amounts of capital last year should conserve cash, lengthen runways, and aim for up rounds in the future by growing into their current valuations. A company that tripled its ARR in a year can now raise at the same valuation as last year, avoiding a down round.

Cash Management and Customer Prepayments:
Founders should consider customer prepayments, multi-year deals with discounts, and headcount optimization to manage cash flow. The focus should be on extracting maximum growth for minimum cost, prioritizing roles that drive growth.

Venture Debt:
Venture debt is complex and may come with restrictive terms. Banks may be reluctant to provide funding for the last six months of a startup’s runway.

Resetting Culture and Performance:
During economic downturns, companies should reassess their culture and performance standards. Entitlement among employees may have crept in during boom times, and companies should consider resetting expectations. Founders should consider implementing more aggressive performance reviews and re-establish a culture aligned with their values.

Hiring and Management in a Remote Work Era:
Remote work offers increased hiring flexibility, but it presents challenges in management and maintaining team cohesion. Hybrid models, with hubs for specific departments and decentralized engineering teams, can balance the benefits of remote work with the need for in-person collaboration.

Impact of Economic Downturns on Startups:
Startups and S&B customers are historically more affected by recessions than enterprise companies. Companies with exposure to the startup ecosystem or consumer credit may face significant revenue disruptions. B2C companies are often the first and hardest hit during economic downturns.

Burn Multiple and Growth Efficiency:
In bull markets, VCs prioritize growth over efficiency. In bear markets, VCs scrutinize the efficiency of growth, focusing on burn multiples and CAC payback. A burn multiple over two may raise concerns among investors.

Exiting Strategies and M&A Opportunities:
Companies that are not default investable should consider M&A opportunities. Most acquisitions are driven by strategic alignment rather than active solicitation. The current market downturn may increase M&A activity, but acquirers’ stocks are also affected by the economic climate.

Key Insights from the Transcript:

Unpredictable Market and M&A Activity:
With economic uncertainties and geopolitical tensions, the market is unlikely to see a significant M&A surge anytime soon.

Inflation and Quantitative Tightening:
Inflation may have started to cool down, but the Fed’s aggressive quantitative tightening could lead to a recessionary environment.

Prudent Planning and Cash Conservation:
Companies should adopt prudent steps to weather the economic downturn, including cash planning and cost-cutting measures.

Offensive Strategies for Well-Funded Startups:
Startups with strong financials and growth potential should consider accelerating growth and seizing opportunities while competitors are pulling back.

Duration of Economic Scenarios:
Six-month scenario: Inflation moderates, economic softening is mild, war in Ukraine resolves, and supply chain issues improve. Eighteen-month scenario: Recessionary conditions prevail, consumer confidence drops, housing market crashes, and recovery takes time. Two- to three-year scenario (nuclear winter): Systemic risks emerge, leading to a prolonged downturn and potential financial instability.

Sector-Specific Impact:
Hot investment spaces like Web 3 and hard tech may face valuation corrections as VCs return to evaluating business fundamentals. SaaS companies with strong metrics and ARR growth can navigate the downturn more effectively.

Business Fundamentals and ARR:
Companies should focus on business fundamentals and metrics like ARR to demonstrate long-term viability and weather the economic downturn.

Fundamentals-Based Industries:
Industries that have always been based on solid business fundamentals, such as SaaS and marketplaces, are likely to weather the market correction better than others.

Cryptocurrency:
Cryptocurrencies may experience a significant correction due to their speculative nature and lack of strong underlying fundamentals.

Capital Pools and Funding:
The presence of a different set of funders in the cryptocurrency space may distort the market dynamics and delay the impact of the correction.

Networking Opportunity:
After the presentation, there will be an hour of networking for attendees who wish to connect and discuss further.