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How health-tech founders can survive a brutal 2024
I wrote a survival guide instead of a rosy predictions post
2023 was hard. 2024 may be even harder. I am not a big believer btw in sugarcoating. Life has taught me that it’s better to face a hard thing with a plan. If you know what to expect, you’re more likely to get through it unscathed. And that’s not the only benefit to transparency. When we are all collectively facing tough times, we can turn to each other for help. Startup founders right now are struggling the most and could use the support.
So let’s get into it. Why might things get worse in 2024?
Let’s take a walk down memory lane. In 2020, you’ll recall that valuations went wild; companies got overstuffed with capital; and VCs raised bigger and bigger funds. Everything was looking good, so many investors marked up their portfolio in anticipation of big returns. When rates spiked in 2022, the party stopped. Public stocks plummeted, making it more challenging for investors in the private markets to justify lofty valuations. Many startups have been subjected to down rounds as capital dried up. Others couldn’t survive the year and have been forced to quietly shut down. Meanwhile, M&A opportunities haven’t ramped up to provide founders with a clean and ego-salvaging exit.
As we round out 2023, a year filled with endlessly sucky moments from the regional banking collapse to the implosion of high-flyers like FTX, I’d love to sit here and say that it’s all over. We can all pop the champagne. But I can’t. Winter is coming, my friends. The very smart solo GP Ian Rountree with Cantos summed it up well with a recent post on X noting that headlines will be even less pretty in 2024 than they were in 2023. As he explained, a LOT more companies will fail to raise in the fall of this year and will be forced to shut down and return money. Those that are still waiting on a raise will go out in early 2024 to find that it’s a circus. Venture investors will be overwhelmed between the struggles of their portfolio companies, the challenging fundraising environment (as they also need to raise), and their existing portfolio.
Essentially, those that were able to sit it out in 2023 will be forced to face the music and fundraise in 2024. Let’s not forget that most companies raise money every 18 to 24 months, depending on burn. Those that raise at all will be fortunate, because the sheer quantity of companies hitting the market will be overwhelming.
Then again, maybe I’m wrong? Perhaps the IPO window opens, interest rates plummet and all will be well in VC land. Living the dream! But in case I’m not, I canvassed some of the smartest folks I know to help you get through it.
1. Don’t forget that there’s no shame in letting go…
Some companies will go the distance. Others will not. If you’re at a company that does face struggles to get to the next phase of growth, I wish I could lean over my computer and give you a big fat hug. You probably put your heart and soul into this thing. Let yourself feel all the feels and take the time off if you can, because grief is normal and experiencing it is healthy.
But there is a light at the end of the tunnel. Because I can promise you this… If you end up moving on and starting over with a clean slate, you will be smarter the second time around. Next time, if indeed there is a next time, it will be easier. You’ll have a faster path to raising money because you’ll know more investors; you’ll have a better sense of the right hires for the early team; and you’ll be better at winning over customers. You’ll be able to cut through the noise far better and you’ll have more friends around to support you.
Michael Yang, who heads up my team at OMERS Ventures, was recently interviewed on this in TechCrunch. He and other investors included in the piece essentially argued that in heady times in the cycle, companies can raise enough capital to drag on for years. Even though there’s never that true product/market fit moment, coupled with momentum, there is often enough capital left to keep things going “just in case.” In 2024, there will be no more room for just in case. It’s either working or it isn’t. And if it isn’t a F— yes, then it probably isn’t worth the 10 to 15 years to make it successful. It’s not fair to a founder and it’s not fair to the employees. This will mean that talented folks will flock to the few companies in every space that are truly working.
2. Don’t be afraid of a rollup
If your company is a feature, not a platform, you are not alone. Perhaps one day and with enough capital, the business will be a platform. But the raising capital part is going to be tricky over the next few years. So why not start making plans?
My friend Rebecca Mitchell at Vive Collective told me recently her firm is actively looking for opportunities to invest in roll-ups, meaning companies that can be merged to form something far more comprehensive and attractive to a buyer. That may allow some companies to fight on and live another day. Founders that game plan proactively before approaching venture and private equity investors, as well as bankers, will have an edge over those who do not.
3. Practice ruthless prioritization
Founders should assume that in 2024, they won’t raise another dime. That sounds harsh, but seriously now is the time to be as lean as possible. Unless, of course, you’re the next OpenAI. Then go hog wild. But most companies are not. So as Stuart Blitz, co-founder of direct-to-consumer company Hone Health, puts it this way (and I 100% agree): “This means ruthlessly prioritizing to get to break-even.”
What do I mean by that? Well, it means cutting back until the business reaches a point when the income is equal to the expenditure. Got a growth initiative that is costing major resources and may not go anywhere? Just say no. Are you still paying a retainer for a super expensive agency or consulting firm that’s not truly mission critical? Find a cheaper alternative or do it yourself. Too early for an expensive Head of Commercial hire? Founder-led sales may be the name of the game.
This will force companies to monetize more quickly than they intended to and really think deeply about what projects and employees are adding value. It’ll force a lot of hard decisions. But ultimately, this will pay off.
4. Think through what a liquidity event looks like for your business
Not all companies are going to generate a $1 billion exit and make everyone involved exceedingly wealthy. Some companies will likely go out at a much smaller price tag and others are more suited to being lifestyle businesses. This is the year to be very realistic about what the TRUE potential for your company is and then make smart decisions around that. For instance, if you don’t expect in your heart of hearts that your company can IPO, don’t waste cycles trying to raise a big round at a big valuation.
This, of course, speaks to my prior post on the importance of tapping into alternative capital sources, whether it’s family offices, crowdfunding websites, or other forms of equity financing. Now is the time to explore your options and get smart. VCs are not the be all and end all.
5. Get into short-term survival mode
There’s lots of debate about there on the great growth versus profitability question. Some smart people are telling founders to find ways to break even. Others are big believers in going for broke and flaming out or taking off like a rocket ship.
I’m in the former camp. Unless the company is not working (back to my first point on the death of triage), it’s time for short-term survival mode thinking. Founders need to focus on unit economics and prove that the business works, so they can get to the next stage. There will be a time in the future when the market improves to step on the gas, but now is probably not that time. Buy yourself a bit more time and optionality. Rather than being forced to shut down because of lack of capital, being smart and sensible means, you are far more likely to be rewarded with a few extra years to figure it out. And sometimes, particularly in health care when things tend to be slower, that’s all you need.
6. Think carefully about a down round versus structure
There’s a lot of conflicting advice in the startup world about whether it’s better to take the hit on valuation or take a term sheet that preserves valuation but includes what is known as “structure.” Structure refers to the set of provisions sometimes included in term sheets. What it usually means is that there’s an investor or set of investors on the cap table with senior preferences, so they get paid back before others. So that’s not great for the early investors and team. But conversely, taking a down round also has its downsides. It can lead to a morale hit for employees and it can dilute the ownership of the early team.
I polled my team on this - as well as the Internet -and most agree that a down round is preferential as long as it’s a clean term sheet. But that might also depend on the company’s goals for an exit. If you’re thinking it’s a quick sale, according to OMERS’ Michael Yang, go for that structure if you have to. But if you’re in it for the long run then take the clean term sheet with a down round. That’s also the opinion of Henry Gladwyn, one of the investors and former lawyers on our team. If it’s a straight equity round, he’d go for the down round versus structure. Structure, in his mind, is only worth doing for a convertible note. That said, he notes, “in 2024, take whatever you can to stay alive!”
What are your tips for founders in 2024? As always, I welcome feedback. I’m reachable on X at @Chrissyfarr, on LinkedIn or via email. You know where to find me.