John Ruffolo is excited about investing in 2023 while everyone else is a tad scared. During 2021 and 2022, he largely sat on the sidelines watching sky-high valuations that made no sense to him. Now, things are a bit different. But he’s careful to note this isn’t all about him winning at the expense of founders. He’s seen this kind of chaos before throughout his 30+ year career and has often found that a slightly chaotic environment driven by fear will help top-tier companies more than a calm or overly exuberant market.

Speaking with TechExit.io ahead of his live conference talk in Vancouver, John shared more about his advice for founders operating in fear-based markets.

How to operate during the fear times

There’s an adage in investing that when everyone else is scared, the smart money is making moves. But you have to do it right. In the startup world, that means not chasing growth at all costs, a sentiment John echoes. But you can’t simply stop chasing growth. Even in bad times, companies need to figure out their next move.

John’s advice is to pivot from a growth first, capacity second mindset to identifying your capacity for sustainable, profitable growth first, then spending the resources chasing the customers to make it happen.

“It doesn't mean that you need to generate profits tomorrow, but it needs to be foreseeable,” said John. “And what that really means is you need to really determine how much growth is sustainable for the organization without blowing up the organization in terms of quality of product or service.”

After that, you have to clean up your balance sheet—which might mean accepting the bitter pill of a lower valuation.

John pointed to the many startups that raised at significant valuations between 2020-2022, with some being worth tens of billions on paper despite relatively low revenues. However, John said you have to adjust “to the realities of today,” which he said is more in line with long-term averages.

In particular, John said that company leaders who accept the lower valuations, get the cash they need to survive, and take care of both customers and employees are “going to be the winners when we get to the other side of this.”

That said, John also added a word of caution: even if you can get a high valuation, be careful. When you accept that valuation, you’re promising to grow into it, which could mean years of toiling away and doing things you may not want to do just for the sake of growth.

“It’s a noose,” said John. “If you exceed your goal, that’s one thing, but if you then completely deviate from your strategy and twist the organization inside out because you want to somehow report to the public that you grew 100% but sort of forgot to tell the market you also lost 50% of the EBIDTA that was rewarded to you in the last three years; now you’re penalized.”

What to do when you’re thinking of selling

Getting through bad times is one thing. But what if you don’t want to keep going? A founder–even if things inside the company are going well–might still wake up one day and realize they no longer care about their startup.

In these cases, John was careful to say the best companies are bought rather than sold. But that doesn’t mean you can’t shop around a bit. Here are a few approaches John said might be useful in this case:

1. Try then buy: Make a list of companies that might be “logical buyers” of your startup. Then approach them about a partnership or some other form of working together. This gives you time to get to know one another, then you can broach the topic of a potential acquisition.

2. Think about the competition: Your direct competitors might want to consolidate their technology stack, acqui-hire, or simply remove you from the marketplace.

“You're going to see acquisitions combining people and products together to make the surviving organizations stronger,” said John.

3. Consider a secondary to take money off the table: If part of the reason you want to exit is taking some money off the table, John said a secondary round could be a good path for you to cash out a little bit of equity without going completely. However, he said every investor will want to know if you’re going to truly stick around or if cashing out some money will distract you from the mission.

Regardless of which path you’re looking at–survive, grow, exit, or something else–John said everyone needs to be on the lookout for what’s coming next. Right now, most economists are predicting either no recession or a light recession in 2023-2024 as fallout from rising interest rates and inflation. However, there’s a risk it might be deeper than predicted, and that’s something investors are watching carefully.

“What I worry is, is the other shoe going to fully drop on the recession and in which case the market is going to drop precipitously in the broader market?” said John. “Being an investor, you always worry about are you coming in it too early now because you haven't priced in the impact of a recession? And that is really my biggest concern.”