Information & Insights

During pessimistic market conditions (e.g. market downturn / epic failures of venture-backed companies) you can expect the venture market to shift and the fundraising process to become more difficult for entrepreneurs.  Concomitantly, you can also expect investors to return their focus on the “fundamentals” of startup businesses; VCs look hard at burn and unit economics to ensure that their investments can weather leaner conditions. Two important unit-economics metrics, customer-lifetime-value ("LTV" or "CLV") and customer-acquisition-cost ("CAC"), can often derail the unsuspecting (or unprepared) entrepreneur. These two metrics are a foundation of unit-economics (the amount a company earns or loses on each sale), and tend to be critical in in investment decisions at the venture stage.  While seemingly straightforward at a high level, there is a great deal of nuance in determining appropriate CACs & LTVs for a given enterprise.

This article aims to provide a brief overview and explanation of the key documents involved in a fundraising scenario where investors are acquiring convertible debt instruments in exchange for investment capital.  In contrast to stock transactions, convertible instrument investments do not introduce new stockholders to the issuers cap-table until the instrument subsequently converts into equity as a result of one or more triggering circumstances. While there are other flavors of convertible instruments (SAFEs for example), this article will focus on convertible debt / notes.

The venture capital business is very cyclical, like any other market it's neither possible, wise, or prudent to attempt to time these cycles. Prudent VCs manage a practicable amount of capital and deploy it, consistently, year in and year out no matter what part of the market cycle they are in. In so doing, the valuations VCs pay for their investments average themselves out, thus allowing them to INVEST IN THE UNDERLYING VALUE CREATION PROCESS and not in the market per se. In this article, we address how VCs have approached economic downturns in the past as well as discuss what we anticipate from them in the current market environment.