Wondering if your startup will survive 2023? Read this article!
Everyone in the startup ecosystem has been low-key anticipating this moment we’re in!
We all knew that the record-breaking rounds of investments, inflated valuations, poor roads to profitability & insane salaries will eventually lead us to some sort of market crash, or at least market adjustment!
If I dare to say, a lot of my corporate friends & many old school investors I know were kind of betting on the downfall of the startup ecosystem, mainly because they felt that everything was growing too aggressively.
The question was: will the same founders whose main skill and talent was telling stories to raise money be capable to lead their companies in these ambiguous times?
Let’s have a quick recap on what has been happening in the entrepreneurial ecosystem on the Micro-level that YOU felt as a talent working for a startup and then a look at the factors affecting the Macro-level that YOU had to endure as a FOUNDER!
Starting with the microlevel:
- Many top talents working for startups were victims of vicious layoffs!
- A lot of senior talents were pressured to accept pay cuts so that their companies are able to pay the junior talents
- The roles you’ve been applying for are closing due to a wave “hire freeze”
- Your founders probably told you in a company meeting that until we raise our next round, we will terminate several projects or products to give our financial runway extra few months!
- They also probably told you that their main investors sent them an e-mail telling them to cut costs as much as they can and to fix their unit economics too!
On a Macrolevel we’ve been hit back-to-back by:
- A global pandemic (COVID-19)
- A war in Ukraine that is increasing energy costs and other costs globally
- A massive wave of prices inflation and possibly a recession
- An even bigger wave of devaluation (in Egypt)
Consequently, investors have not just become more cautious about deploying funds, but their appetite to investment might have changed a little bit!
While these investors still have capital in the market that won’t disappear overnight, but the way they use it might change drastically.
For the past few years, VCs have been investing in these hyper growth business models and accepting stretched valuations in a founder-led market. In some cases they were pressured to cut short due diligence time & jump on specific investments to not miss out on!
For some time now, the leverage might have been at the hands of the founders, but now it’s really hard to tell whose hands it’s in today!
You see, some LPs have actually given up on giving money to the VCs, so even some VCs are struggling to invest.
In fact, these VCs are not just struggling to invest, they are explicitly telling their portfolio companies to review all forecasts, expenses, runway & to basically “get it together”!
The question is, how can you tell if your startup will survive 2023? What trends should you expect to see at your startup that could tell you they are more likely to survive than other companies?
1. Retiring the “Growth at any cost strategy”
If the internal dialogue at your company is shifting to focus on sustainable unit economics & decreasing CAC, then this potentially a positive sign.
For so long, the “Growth at any cost” motto has been embedded in the software of startup talents to the point that beats the business logic of a 6th grader who intuitively would feel there has to be a cost!
If anything, these tough times we’re in will kill a few well-funded startups in your industry, giving your startup more space to acquire users from different channels at a more realistic cost. (If your startup is lucky enough to be the survivor of course)
Remember we’re looking for “lasting scale”; I’m sure you can name at least 2 startups that achieved fast scale but are now at the graveyard.
This is a great time to focus on organic growth & enhancing user experience of current users instead of growing 100% at negative unit economics.
2. Less projects & products; more focus & prioritization
When leading strategy discussion in your 2023 planning meetings, many decisions should revolve around what your company can sustain!
Basically, any project or product that doesn’t contribute one way or another to the most critical business metrics should be killed as it is mostly noise.
A healthy discussion between the management team and their investors should include prioritizing which metrics are the core focus and which are vanity metrics that no matter how good their trajectory is, they won’t help in growing, raising another round & surviving another day!
3. Diversifying customer base!
This might be a bit specific, but I personally know founders who reject experimenting with B2G or B2B2C because they think these business models are not matching to their long-term strategy or are not sustainable or maybe have a long sales cycle. While this might be true, it’s important to remember that:
At tough times
Survival > Winning
So if you take on a not so relevant B2G deal that can fuel up your runway for an extra few months, so be it!
It’s a temp survival solution at this point, because a lot of your current customers might not be able to pay you anyways!
4. Increase Talent Density while adjusting salary scales & structures
During the phases of fast growth, startups hire aggressively fast to fill roles that “need to be filled yesterday!”
These roles are time critical so startups pay a premium to hire them fast.
They might also pay a premium because there aren’t a lot of supply of these specific talents.
This might lead to an inflation in both the salaries and the headcounts!
Now might be the right time to go through who you need, who are they reporting to & what salary does them justice.
Now my corporate friends reading this might be feeling that finally someone is talking about the inflated salaries in startups (I spoke about it here previously: https://rb.gy/wkqsvq)
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But in reality, I’m talking about reallocating the salaries to priority roles and killing redundant ones!
This means:
a) Some startups who couldn’t afford hiring top talents will be able to, because these talents might be jobless now and might accept a salary dip
b) Talents with a good track record in domains where there aren’t a lot of supply, might actually find their salaries increasing and startups willing to hire them because they need what these talents offer
5. Terminating hidden costs!
There are a lot of expenses that are not just piling up on your startup without you noticing, but are also no longer creating any value or ROI!
Anything from outsourcing costs like agencies you’re paying a retainer to monthly subscriptions on productivity tools that no one uses to any company benefits that genuinely no one cares about or even knew they existed to that extra coworking room that you’re renting for your tech talents for them to never actually end up visiting…
You might think that consolidating and cutting these isn’t a big focus; but let’s just say it’s time to get creative with cost cuts before thinking of layoffs!
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Let me wrap this us.
- With many VCs stepping out of the market for the time, competition for investing in startups will decrease and along with it the startup valuations will readjust
- VCs will become more cautious in their investment decisions
- Burn rates will drop & cash will stop being sacrificed for unconditional growth
- Founders will shift focus from raising investment round after round, to actually looking inside to the company more and focusing on optimizing the situation. (a part of their JD that some might have ignored for so long in the chase for the bucks)
- This is all happening at a time when entrepreneurs are pressured to control costs and keep an eye on cash flow because the old rule prevails: Cash is King.
My mentors tell me that market crashes don’t last forever, and whoever survives them comes out so much stronger on the other side. I hope they’re right, a lot of us we’re young when the last market crash happened in 2008 so we really have no clue what to expect!
