No one can predict the future – there’s no crystal ball to reveal how the next few years will unfold. Many startups’ experiences during the coronavirus pandemic were evidence of this. As lockdowns started to take grip across the globe, investors advised companies to cut costs, batten down the hatches and brace themselves for a long period of uncertainty.
Yet, 2021 saw global venture investment hit $643 billion, with record amounts of funding poured into European startups ($116 billion – up 159% over 2020’s $45 billion), and companies chasing growth at all cost. With cheap capital flowing, entrepreneurs had the ability to walk a tightrope with a safety net of abundant financing beneath them. Now, there’s no guarantee the safety net will be there.
The conflict in Ukraine, increasing inflation and the sell-off of public tech stocks has led to turbulence in the public markets and the impact is now trickling down to startups. The S&P 500 is down 19% since the start of the year, the Nasdaq has plummeted more than 28% and growth stocks are down over 60%. While similarities are being drawn between the economic downturn we’re now seeing, the 2008/9 financial crisis and the dot-com bubble in 2000-2002, no downturn is the same and we’re in a very different place today when it comes to the maturity of the ecosystem – both capital and talent – versus 2008. There’s a lot of venture capital dry powder in the market and the European ecosystem has a wealth of strong founders and operators building innovative companies.
With companies raising unprecedented amounts of capital over the last two years (2021 also saw more VC funding than ever before, smashing 2020’s record), many startups are far from cash-strapped and have plenty of runway ahead. The big difference between today and where we were a few months ago is the cost of capital has increased. When the cost of capital was very low, it made sense to make investments generating incremental but marginal growth. However, as the cost of capital increases, return on investments has to be more carefully considered by investors and companies have to re-evaluate their plans accordingly.
An economic downturn remains a turbulent and unsettling time for founders and their employees. While there are no hard and fast rules or a “one-size-fits-all” approach to navigating the path ahead, now’s the time to control your own destiny and seize the opportunity ahead. Not every company will have to go into crisis mode, many will continue to grow and gain a competitive advantage, but here are some points to consider as you set out to build a category-defining business:
Expect to Learn:
- Work backwards from your next financing event
- Map out your talent needs
- Grasp the opportunity ahead
#1 Work backwards from your next financing event (if one is needed)
Consider when / if you’ll need to secure your next investment and then map out all the milestones you need to hit in order to raise money at X valuation by Y point in time. Keep in mind that the public market shift has resulted in a higher bar being set when it comes to metrics and terms on which funding will be secured are likely very different from those a few months ago. Private multiples will eventually converge towards public multiples and you’ll need to have a realistic assessment of how much time your company will need to grow into the valuations that were set in 2021/22.
As you assess your target burn rate and runway, consider how the current environment may impact your current customers and pipeline. Now is the time to closely examine who you’ve been selling to, how your customers will be impacted by this environment and how you think your pipeline conversion ratio may change. We’ve seen companies in the past quarters coming in with a strong pipeline but seeing conversion rates radically different from historical levels.
The path ahead may require a completely different operating plan. Now’s the time to shift into the mode of effective spending, and ensure there’s an ROI culture and focus across the business.
#2 Carefully map out your talent needs
Assess whether you have the team, software, and operating practices in place to navigate the current climate. If revenues fall or your options for future investment are limited, unfortunately team cuts may be unavoidable. If you do have to part way with colleagues and friends, don’t delay the inevitable and draw out the process. There will be difficult conversations ahead, but you shouldn’t procrastinate. Also ensure you only have to make cuts once. Your remaining team members should have confidence in the fact they’re staying and not be left worrying about whether they’ll be the next to go. Such uncertainty can have a serious impact on team morale and showing leadership and professionalism in tough times is vital.
As mentioned earlier, there’s no “one-size-fits-all” approach and each company is unique, so there’ll also be startups who have enough money to keep hiring great talent and be able to offer them competitive packages. Just a few months ago, it was incredibly hard to hire great talent and there was a huge amount of wage inflation. Now, companies are announcing hiring freezes or having to let staff go, so there’ll be exceptional talent looking for new roles. Companies with money ready to be deployed can adapt and take advantage of this market opportunity, assessing what talent they need to hire for growth and how they improve their employer branding. For company leaders, leading a team in a downturn is a very different role to the one in good times. Leading by example and staying focused is key.
#3 Grasp the opportunity ahead
It’s easy to read articles on the current market and end up in a spiral of doom. According to Bloomberg data, in the week up to 21 May, there were 8,200+ articles about the “bear market”, which is the second highest frequency (by quantity) over the last decade. Don’t lose sight of the fact that numerous innovative companies have sprung up during downturns, including Airbnb, Facebook, Slack, Uber, Venmo, and many more. There’ll also be strong M&A and partnership opportunities ahead. Now is the time to reassess and be realistic, but also to be ready to seize the opportunities.