With IPOs down 95%, executives must answer three tough questions

I was taught in school that finance should support a company's strategy. Specifically, a business leader must first choose a strategy, such as which customers to serve, what products to sell them, and what price to charge them, and only then assess how to finance the strategy.

Yet, over the past few decades, startups have shaped their strategies around the cost of capital. When the cost of capital was low, startups offered products that were priced to sell quickly so the company could hit the $100 million in revenue needed to go public. Institutional investors, spurred by fear of missing out (FOMO) IPO profits, were eager to fund startups' negative cash flow.

Unfortunately for startups, this FOMO-driven investment strategy ended when the IPO market dried up. In response to the abrupt end of abundant capital, startups have rushed to expand their cash trails.

That brings us to where we are today: an IPO market that could be closed for years. According to CNBC, through July 2022, IPO issuances fell 95% to $4.9 billion. Total equity issuance fell 80% to $57.7 billion.

The IPO market is largely closed until at least 2023. What do you mean ? As Michael Greeley, general partner at Flare Capital Partners, told me in an interview on September 2: "The IPO market is closed until the end of 2022. Investment banks have laid off 80% to 90 % of all their capital markets bankers in the last three years to four months. Their ability to accelerate the IPO market will take quarters."

Now that the IPO market has evaporated, venture capitalists are asking their portfolio companies to go self-sustaining, which means changing their product portfolio so they can earn higher margins and maintain thanks to their profitability.

Here are three questions board members are asking business leaders in the face of the long hibernation of the IPO market and how business leaders can effectively answer these questions.

1. Can you extend your company's cash trail?

This is the most fundamental challenge for business leaders whose businesses are burning cash. To extend a company's cash trail, managers must assume that they won't be able to raise more capital for years.

Therefore, in the short term, they need to reduce their costs, which will reduce their monthly cash consumption rate and thus extend the duration of their remaining cash.

A good example is Snap, a social media company that recently cut costs in a way that generated a 15% increase in inventory after announcing plans to remove 20% of its 6,000+ employees and to halt several product developments. projects, according to CNBC.

These cost reduction measures were underpinned by three strategic priorities: "community growth, revenue growth and augmented reality". Its Pixy photo-shooting drone and premium Snap Originals shows didn't fit those priorities and Snap is cutting them.

Here are four steps leaders should take to extend their company's cash trail:

Set strategic priorities - areas of focus on which the future of your business depends Identify the projects and people that are essential to achieving your strategic priorities Decide which of the remaining people and projects you need to cut Calculate your cash trail based on the lower consumption rate resulting from these reductions

Single-product companies face even tougher challenges. Greeley, whose portfolio companies include healthcare and technology service providers, shared with me two questions that are generating heated conversations right now.

2. Can you re...