Funding high growth, high burn startups isn’t as easy as it was 6 months ago. Startups raise capital when they can, but it’s not obvious what happens if their fundraising efforts fail.

Are they destined to close shop or are there other possible outcomes?

A few thoughts: 🧵👇
There isn’t a simple generic answer to this question but I can share a framework that I’ve used in the past to help think through the fate of companies that find themselves “technically insolvent”. It’s based on a concept that I call “Climbing the Relevance Curve”.
At the core of “relevancy” are two simple questions:

1)Will anyone care if the startup closes shop?

2)How much money is the startup burning?

The questions might seem incredibly basic on the surface but the answers to these questions speak volumes about a startup’s options.
Will Anyone Care?

At the foundation of “relevance” is the concept that a business is either relevant or irrelevant through the lens of a counterparty.

The all-important question to ask is who (if anyone) would be significantly hurt if the business were to go away tomorrow?
When a startup would be missed it has intrinsic value. When a startup is serving a necessary function for its customers then if it were to disappear its customers would have to seek a replacement. And the worse the replacement options are the more a startup is worth.
How Much Money is Being Burned?

The second piece of the framework requires understanding how much money a startup is burning and how much total capital it will need to turn profitable.

There’s a fine line between buying an asset and buying a liability.
The answers to these questions should crystalize who the “today” buyers are as well as a rough idea of when a startup becomes relevant to “tomorrow” buyers.

Relevancy matters because buyers won’t go through the brain damage of acquiring a startup that isn’t relevant TODAY.
If a startup has no deep-pocketed counterparty that deems them as “relevant” then it has no choice but to rely on Investors or free cash flow for support while it continues to climb the relevance curve and wait out bad market conditions.
Distance from relevance is very important because the best VC backed startups grow at an amazing pace. It’s becoming more common than ever for startups to deliver 3X+ annual growth rates which implies that relevance is a function of time for high growth startups.
Investors can choose to infuse capital into a startup if it isn’t relevant yet but is climbing the relevance curve quickly.

But the converse is also true. If a company isn’t becoming relevant quickly enough then new capital might increase exposure rather than generate value.
A low growth startup that’s burning fistfuls of cash will be seen as an albatross while a high growth startup that needs a small amount of capital might be seen as an asset.

Being “default alive” with a few tweaks is a strong position to be in while being “default dead” isn’t.
What about proprietary tech? What about an embedded user base? What about IP?

A rule of thumb about the value of these assets is simple.

In “risk on” markets, value can be ascribed to “soft assets”. Good money will be paid for well built tech and sizeable customer bases.
But these assets unfortunately have little value when market conditions aren’t favorable.

In “risk off” markets, assets owned by money losing startups typically normalize to a valuation of zero. This is sad but true.
While some may think I’m being overly harsh and too “black or white”, the relevancy framework is based on real conversations I’ve had in the past with sophisticated acquirers. And FWIW, I’m having similar conversations today that make me believe that the framework is valid.
The TL;DR: I’ve watched this climb many times across many different business models and business cycles and the story is the same. Becoming “relevant” is not just important, it might actually be the most important metric for a startup to track.

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