This post is by on Tomasz Tunguz from on Tomasz Tunguz
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Leverage. It’s the key to negotiating. Classic negotiating books like Getting to Yes define the BATNA, the Best Alternative to Negotiated Agreement. If you were to walk away from a conversation, what’s the next best choice? The BATNA singlehandedly creates leverage in negotiating.
Over the last few years, startup founders have exerted tremendous leverage in the fundraising market by taking advantage of the supply/demand imbalance. Too much capital chasing a sliver of exceptional startups. When demand exceeds supply, valuations and round sizes balloon. A fast-growing startup’s BATNA had been the other investor waiting in the lobby, term sheet in hand.
But the nature of leverage in fundraising conversations is changing. The 40%+ share price declines of Tableau and LinkedIn this morning illustrate the turbulence a company’s valuation can experience when growth slows or the finicky market decides to value it differently. The 16%+ drop in Q4 2015 figures indicate some in the venture market too.
Fast growth and high burn rates today put startups in a precarious position. There may not be a BATNA, another investor in the lobby, in 2016. So the BATNA is a reduction in force, aka a layoff.
Fast growth at efficient burn rates is in vogue today. The closer to cash-flow break-even (CFBE) a startup is, the better their BATNA. At CFBE, the business doesn’t have to raise capital to continue to grow. The founders control their own destiny and possess the ultimate BATNA to keep fueling the business’ growth with the company’s revenues.
Consequently, the startup can exert enormous leverage in fundraising conversations, particularly, if the business is growing at an attractive clip. The BATNA is increasing the value of a self-sustaining, growing, healthy business.
I’m not advocating that startups all push immediately to reach CFBE. But I do believe that founders should always have mapped a path to CFBE on the current cash reserves of the business. This self-sustaining plan a valuable call option to have in uncertain times.
As the environment evolves and prices fall, the strongest BATNA for startups will metamorphose with it. In a tempestuous market, self-determination through positive cash flow may be the best bargaining chip in a fundraising conversation.
“Give me a lever long enough and fulcrum on which to place it, and I shall move the world,” wrote Archimedes. The dynamics of the fulcrum and the lever will be different in 2016, but startup founders will still move the world.