VC bust? Time to return to fundamentals in 2024

Venture capitalists (VC) and startup founders will remember 2023 as the year the party ended.

After years of record investments and outsized returns fueled by ultralow interest rates, 3,200 U.S. private venture-backed companies—mostly tech startups—went out of business last year. Collectively, the companies had raised $27.2 billion in venture funding. If history is any indicator, the collapse is just beginning.

While that’s bad news for founders and investors, Doug Villhard, a professor of practice and academic director for entrepreneurship at Olin Business School at Washington University in St. Louis, said it presents an opportunity to return to the fundamentals in 2024.

“I prefer times of bust,” Villhard said. “Busts are rational. Booms are not.”

“During the height of the VC boom, I’d have VCs come into my class, for example, saying, ‘Which kids are working on something in crypto? That’s all we want to meet with.’ They ignored all the other promising ideas and young entrepreneurs, even if, for example, they had a new way to manufacture circuit boards, making it possible to move production from China to the U.S. ‘Who cares?’ they would say. ‘We hate any products that are physical. Cutting-edge digital only. What do you have in crypto? Or web3? Or AI?’”

I prefer times of bust. Busts are rational. Booms are not.

—Doug Villhard

Of course, it was fun watching his students working on crypto, web3, artificial intelligence and other tech ideas get funded after two slides of their pitch deck, but Villhard said a bust causes an industry to reassess what is really important. 

Villhard started his career at The Walt Disney Co. before becoming a serial entrepreneur, starting, selling, buying, advising and investing in companies. Under his guidance, Olin’s entrepreneurship program has consistently been ranked first by Poets & Quants. So, he knows a thing or two about what it takes to build a successful startup.

“As an entrepreneurship professor, I love busts because we are returning to fundamentals. And what I teach is fundamentals,” he said.  

According to Villhard, any hopeful startup should be able to answer basic questions, such as:

• Are you solving a problem big enough that a customer is willing to pay?
• Are you clearly differentiated from the competitors/alternatives?
• Do your unit economics make sense that you’ll have enough gross profit to cover your expenses and become profitable?
• What can you do to quickly/cheaply get to market to prove all of that?

“I’m also a big proponent of having empathy for the customer,” Villhard said. “Talking to customers helps you better de-risk a business idea. We spend the first half of all my classes talking to customers before we build or pitch anything.”

Another essential lesson that Villhard tries to instill in students is to have empathy for VCs and to think about how they raise their funds.

“The pension plans and endowments that provide the lion’s share of VC funds have lots of options outside of VC: bonds, stock and other private investments,” he said.

“With interest rates so high, VC funds are taking fewer super-risky chances at the present. Thus, entrepreneurs need to develop a startup the world can’t say no to. And the hardest thing to say no to is when you are already generating consistent revenue with high margins. That proves you have something differentiated that the market desperately wants,” Villhard said.

“There will always be funding sources for entrepreneurs who can stick to fundamentals, including the old-fashioned way of selling something for more than it costs you to make and then rolling the profits back into the business to grow,” he said.