“Never waste a crisis” — some insights for founders to better position their businesses in a tough market.
2022 was a year defined by global uncertainty, market volatility, and the tech and entrepreneurial ecosystem returning to prioritizing revenue and efficiency metrics over sky-high valuations. Of course in bear markets, it’s difficult to spot the silver linings, but these cycles are a natural course of the market and are healthy to “clean up” some of the excessive capital and unhealthy behavior that entered the system. . (I know that’s easier to write than it is to feel when you’re a CEO or builder in these tough conditions.) In my 10 years of investing, the market mostly kept going up, which means most of the founders out there have only lived through one side of the cycle. But the takeaway for founders is this: 2023 will likely be a year for businesses to find new footing, focus on serving their customers (and not on investors), and work on improving efficiency and resiliency to ensure they come out stronger.
Entrepreneurship always remains en vogue if you can weather the tough conditions! For those that focus on managing runway, build stellar products, and strive for market leadership, you’ll likely reach the end of the tunnel and benefit once the bull market returns. Or as Winston Churchill famously said: “Never let a good crisis go to waste.”
With that in mind, I wanted to share three key trends that are likely to become a reality in 2023. While these are less than positive insights to share, I try to offer a few key insights so founders can either push through the headwinds or make the most of a difficult situation.
- The number of startups closing shop will increase every quarter during the upcoming year, with the peak sometime around Q1’24, exactly two years after the public market correction. Unlike public companies that immediately saw their valuations drop, private companies are for the most trying to delay their next round until they grow into the previous valuation they received. Some will succeed, and some will even eclipse it. However, many startups that raised money without a strong product-market fit or with bad unit economics won’t be able to raise capital in this more demanding environment and will be forced to close. Most companies raised money for 24 months, so assuming many companies refilled their cash tank in 2020–2021, we will see more startup closures every quarter that goes by during the upcoming year. Tip: If you’re a founder facing the hard truth that the business might not survive, don’t wait until the last minute when you are forced into a fire-sale mode. Move quickly now to positioning the company for M&A or strategic acquisition when you still have a year worth of runway.
- We’re on the precipice of a “great consolidation.” We will see a jump in the number of startups merging or buying each other. Too many similar startups got funded over the past several years, and since they could all keep raising money, there was no incentive to consolidate. When capital is more scarce entrepreneurs and investors will realize they are often better off becoming part of a larger entity than continuing to run as a standalone business. This is especially true for the number three and four players in each category which until now pursued an independent route but will now need to either merge with a bigger player or take the risk of shutting down. Tip: Evaluate your market very candidly. If you are not the number one or two in your category and/or the market is not shaping up to be what you thought, then this is the time to look for an acquirer. In many emerging categories, when viewed in hindsight, the winners were often the ones that decided to sell early and not play until the end.
- Good news: For the best companies out there which are managed well, the market correction is great news. As they get through “the winter” (e.g. ”the winners’) they will only become stronger (and keep raising at high valuations)- Unlike 2000, the error of the “COVID bubble” was less about funding startups that don’t have a sustainable business model, but rather the issue was an abundance of capital chasing a naturally limited supply of good opportunities. The result was inflated valuations, less efficient startups, as well as too many B-grade startups which got funded. With this market correction, the winners will only get stronger as they will now be forced to become more efficient, will be able to recruit stronger talent, and will face less competition as the number three and number four companies in their space will struggle to raise capital. In addition, there is still plenty of VC money waiting to get deployed, and we will see more flight to quality when the large investors prefer to back the top startups than take a risk with the struggling ones. Tip: Make sure you stay aggressive enough (yet efficient) if you are a clear category winner. This is your time to shine while your competitors lose ground.
The truth is that the cheap capital that we saw over the past few years was not good for the industry as a whole. When capital was abundant and companies were measured only on growth, it was very difficult to stay lean as the market encouraged bad behavior. Now as the market readjusts, the real winners will be able to distinguish themselves from the rest. Take advantage of this market opportunity to ensure you forge ahead.
