What does this mean for entrepreneurs?
Don’t expect a turnaround in the immediate future. Until the broader market stabilizes, the outlook for Q1 2023 remains uncertain. The fundraising environment is expected to remain challenging for existing companies. Looking ahead, entrepreneurs should continue hunkering down to extend their capital reserves in a difficult fundraising market.
A few recommendations come to mind:
- Scale smartly: For years, the venture capital and startup industry operated under a growth-at-all-costs strategy that may have been acceptable during a period of easy money, but this is no longer viable. Companies need to embrace “smart” scaling: taking incremental steps toward rational growth vs. undisciplined expansion predicated on the belief they will always be able to raise additional capital. For the near future, more organizations will likely move cautiously as they emphasize increasing topline revenue while effectively managing costs.
- Focus on finance: At the same time, companies should carefully review operations and use a scalpel rather than a cleaver. Finance is one typically underinvested area in startups. It should not be viewed as a cost center but rather as one that plays a major role in protecting the organization’s overall value. Companies that will want to sell or monetize their business need to have a strong financial tracking system in place that can produce accurate and reliable financial data for investors to review. Those that can’t will have trouble attracting investment or getting acquired at the price they anticipated.
- Assess and innovate: The trifecta of limited capital reserves, waning demand and market headwinds means companies will need to innovate to survive. Reassess the competitive landscape, refine your market positioning, and constantly iterate on your products and services. This may require a product pivot or customer shift or refinement of the product. Be prepared to benefit from opportunities where competitors burned too brightly and too fast. All options should be on the table.
- Continue investing in your team: Don’t lose sight of the importance of recruiting and maintaining a strong team. Some great people could become available as companies reassess and shift their areas of focus. A key addition to your team could make a big difference.
While the decline in VC investment was stark in 2022, this is not all doom and gloom. We are coming out of a period of unprecedented activity and growth. VC-backed companies still raised more than $200 billion during a volatile market characterized by inflationary pressures, an unstable geopolitical landscape, rising interest rates and recessionary fears.
The industry is going through a course correction. To borrow a skiing metaphor, many companies got “too far over their skis” throughout 2020 and 2021. They grew too rapidly, adding staff and expanding into business ventures that failed to deliver tangible and timely results.
Investors and entrepreneurs now remember just how hard it is to start, build and finance a new enterprise. Driving sustainable success takes time and hard work, and startups need to play the long game. The market will rebound, but it won’t happen overnight. Entrepreneurs need to develop a sound value proposition, with a viable path to profitability and long-term plan for growth. Organizations that are able to do this will survive and even thrive in 2023 and build a successful foundation for the future.
It is, however, a great time to start a new company. Many brand-name companies were started during recessions and downturns. In these times, investors are looking for opportunities when valuations are lower, expectations are more rational, and companies are grittier and more tenacious. Capital is harder to come by, and entrepreneurs realize that and act accordingly.
In five years, we will likely look back and point to several great companies that got their start this year.