Morgan Stanley
  • Innovation LAb
  • Aug 12, 2022

How to Thrive in a Changing VC Landscape

We asked experts to share their top tips on succeeding during an economic downturn with recent participants and alumni of our accelerator for diverse-led startups. Here are their key takeaways

Pete Chung has some unique yet powerful advice for diverse startup founders trying to survive and thrive in a world that’s been turned upside down by a global pandemic, a land war in Europe, inflation, rising interest rates, and a seemingly unending roller coaster of a financial market: Think of it as a road rally.

During boom times, he says competing in business is more of a drag race: “A drag racer has a straight path forward and it’s all about horsepower and reflexes. You have a parachute to stop you, so you don’t even need brakes.” During an economic downturn, on the other hand, you need to think like a rally racer, who is “navigating on twisting dirt roads and doesn’t modulate speed by accelerating, but by jamming on the brakes, because they never know what’s around the next corner.”

Chung, who is a Morgan Stanley Managing Director and Head of Expansion Capital, shared his insights in a recent interview with the firm’s Head of Multicultural Client Strategy Selma Bueno. Bueno hosted the virtual event for the most recent cohort and alumni of our Multicultural Innovation Lab, an accelerator for tech and tech-enabled startups led by women and founders of color.

The Innovation Lab was founded in 2017 as a way to help close the funding gap that diverse founders traditionally face when it comes to raising capital, and provides access to investors along with the tools, resources and connections entrepreneurs need to grow and scale their businesses. It has since grown to two cohorts a year and last fall, expanded to London to support entrepreneurs in Europe, the Middle East and Africa. The founders in our most recent US cohort, whose companies include a no-code augmented reality creation platform; a manufacturer of mobile, turnkey solar and green hydrogen nanogrids; and an AI-enabled, diversity-focused jobs platform, face even more hurdles than previous participants, as the economic downturn means VCs are proceeding with caution when it comes to adding to their portfolios.

It’s a topic the Lab’s leaders addressed as part of this year’s programming, which included not only Chung’s session but a conversation during Demo Day, the Lab's final event during which founders have a chance to pitch to potential investors. That virtual interview, hosted by Edward Stanley, Executive Director, Morgan Stanley Thematic Research, included Miriam Rivera, Co-Founder, Chief Executive Officer and Managing Director, Ulu Ventures, a seed-stage, enterprise-focused fund based in Palo Alto, and Brian Laung Aoaeh, General Partner and Co-Managing Partner of REFASHIOND Ventures an early-stage supply chain technology fund.

So what other advice did Aoaeh, Chung and Rivera have for  founders? Here are some key takeaways:

 

  • Identify your special sauce. “Know the one thing you do differently than your competition that’s not obvious. What you wouldn’t have figured out if you hadn’t been forced to because you didn’t have enough money to do it the regular way,” says Chung. “All successful companies have something they implemented when they were under-resourced and that became the core of why they compete more effectively. Something that creates a shortcut in capital to get to results. That’s what you’re going to be looking for in a time when you’re trying to stretch dollars.”.
 
  •  Focus on these three key objectives. According to Chung, those are: 1) Gross margins. “The higher the gross margin, the more time you have to fix something before you crash. You want to have 80% gross margins, not 20% gross margins.” 2) Capital intensity. “A business that requires you to sink lots of cost in the ground before extracting economic value will fall out of the sky like a helicopter when things slow down. You want to be a glider.” 3) A “land and expand” sales model. “How do you get the customer nibbling and tasting as quickly as possible? What you want to do is get that client in the door. Your job is not to extract maximum value, it’s to extract maximum engagement.”
 
  • Find new ways to get more bang for your buck  “A lot of cost management tends to be on the people side.," says Rivera. "One of the advantages for startups is that there are experienced entrepreneurs and technologists on the market now. They are leaving other companies, either because of the Great Resignation or because of layoffs. And there are other opportunities, too. Many of the founders in our portfolio are immigrants or have studied in other countries, so they often have access to engineering talent at a much lower cost than owners of other companies do. Mission-driven startups also underestimate the caliber of the people they can get with they salaries they can afford—aim higher!” 
 
  • Convince investors and customers of your ability to do more with less “I tell the founders in our portfolio, ‘This is your time to shine,’” says Aoaeh. “This is your time to go to your customers and explain just how much value you can create for them. Point out to them just how underutilized your technology is.” Chung agrees: “It’s obviously scary times. But being lean and quick and nimble, and delivering cheaper, faster, better—which startups tend to do--can make a big difference. If you can buy yourself the time to get through until the worst of it is over, you’ll be the mammal who survives after the dinosaurs disappear.”
 
  • Don’t sacrifice profits for growth. “Startups should be impatient for profits and patient for growth,” says Aoaeh, paraphrasing the late Clayton Christensen, an author,  consultant and Harvard Business School professor who developed the theory of disruptive innovation. Chung has a similar take. ”To the greatest extent possible. you need to think about using dollars that you were thinking about allocating towards growth in a way that still achieves critical milestones. That’s a super hard thing to do right now. But when we look at a company, it’s not about growth at all costs. We want to know, what is the return on that last dollar you spent that is reasonable?”

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