Markets move in cycles which company builders need to understand and build with and not against.
“Don’t fight the wind,” we are told in the seminal science fiction epic, Foundation.
My default position is to resist this idea. Perhaps because I am a startup builder, and the wind will always blow over something that is fragile and new. To succeed in startups, we must fight the wind.
As a startup investor, I began 2022 fighting the winds of market change. I listened to peers in venture capital talking themselves into a trough, and I was frustrated to see the stories strengthen a negative reality. I resisted the idea that the market has phase shifted to a new dynamic.
Over the past year, I have listened to the market, and I now know I need to adapt, or my portfolio will suffer. So here I am, one year later, in the trough, dragging you in. At the start of 2022, we were talking about a downturn, but we were still in the tail of 2021. There were some good rounds in 2022, but many of these were completed projects from the year before and the headwinds of the phase transition have grown stronger.
2023 is going to be different.
I am heading into 2023, listening to the market. It is no more “good” nor “bad”, “weak” or “strong” than any other living organism. Markets move in cycles which company builders need to understand and build with and not against.
Fighting the wind will not be a strategy for success in 2023.
What’s happening out here in the market?
Part of a startup investor’s responsibility is to help companies raise capital from other investors. As I have worked with our portfolio over 2022, I have observed the following dynamics:
- It is harder to get the attention of investors. They are spending more time shoring up their existing portfolio and thinking more deeply about any new investment.
- Valuations are being carefully weighed and, in some cases, aggressively reduced. There is a common belief that pricing got away from us and that some companies have valuations which they will struggle to ‘fill with proof’ before needing to raise again.
- As a function of these observations, it is harder to get a lead that can start the process. Rounds are taking longer to catalyse. Taking a lead position includes agreeing on a valuation and the reputational consequences of this are greater for investors as they define the terms for their peers to accept in a syndicate.
- These observations are more pronounced the more mature the company is. If a company is mature enough to be measured as an operating business as well as a valuable technology, then it had better be performing.
Finding a different way to your destination as a startup founder
All this is a bit soul-destroying for startup founders with a mission to make the world better. How should founders think about this market phase?
- Reframe time, not the mission: there is no reason for the mission to change; it might just take longer than initially planned. Most of the companies I collaborate with are building new industries that might take a decade to develop. Stay focused on that timeline and allow the next 2 years to consolidate strength in what you have.
- Become impossible to break: look critically at the business and structure it for resilience. You won’t achieve the mission if your company is dead. Measure how you deploy resources, double down on what works and quickly stop projects that don’t perform as expected.
- Delay raising money: there is a good chance you will spend too much time (that could be spent building the business) and end up with a lower valuation than your previous round.
- Synchronise deliverables with runway: by the time you need to start raising money again, make sure the parts of the business you are building today are complete and ringing with confidence. It might be a waste of time and money working on projects that will be unconvincing by the time you need to raise.
- Work with your existing investors: share your strategy and understand their capacity to help you going forward. Can they lead your next round? How can they help you build a case for the strongest next milestone?
- Share the urgency with your team: there is little value in pretending you are not a startup and that there is a job for life. Be really clear on what the company needs to deliver and what each person’s role is in delivering it is. 99% of people would rather hear this and work with you to succeed than find out one day they are out of a job.
Keep going
These times are not worse; they are just different. Adaptability is our secret weapon. My mission is unchanged, but my path to get there has been. That’s OK. It is OK for you too.
Phil Morle, Partner, Main Sequence