How Startups Can Succeed In the New Low-Valuation World Money might not flow like it used to, but these tips can help you succeed as a startup in a low-valuation world.
By Ariel Shapira Edited by Micah Zimmerman
Opinions expressed by Entrepreneur contributors are their own.
If you find yourself at an opulent ball, waltzing beneath chandeliers in the crystal shoes your godmother got you from Versace, it's easy to get carried away.
Still, sooner or later, the clocks will strike midnight, and the shiny new Tesla that brought you to the castle will turn into a pumpkin in another step toward sustainability for the brand.
This is precisely what's happening on the startup scene today. For all the grim prophecies of the pandemic-era doomsayers, 2021 was a stellar year for founders, producing more unicorn startups than the previous five years combined. In 2022, however, things could not have been more different — startup valuations are down as venture capitalists get more conservative in their offerings.
By now, we all know what has happened. The stock market is in shambles, with NASDAQ shedding almost 30 percent over the past six months. Inflation is rising, with the U.S. posting record levels and the rest of the world following suit. Strained supply lines, the wheat and gas price hikes on the back of the Russian invasion into Ukraine, and many other pressures weigh down on the global economy. Investors have to adjust their strategies.
Related: How Startups Can Attract the Right Type of Investors
As a result, a new wind is blowing over the tech scene. Tech giants are taking a beating as their equity investment efforts are beginning to bite back. Large and small companies are laying off staff and cranking down their hiring goals. Startups are told to plan for the worst and be more cautious with their war chests, as those may be harder to refill down the line.
So how should startups adapt?
Weathering the storm
There seems to be an attitude adjustment across the tech scene, which may have been overdue. In today's turbulent times, entrepreneurs and pundits urge against betting on the hyper-scaling strategy. Growth for the sake of change will no longer cut it, and it is time to focus on sustainable business models built into the project from its advent.
Such assessments are hard to disagree with. We lived for too long in an age of companies raising wild sums without turning in a profit in the first place. It may be tempting to keep fundraising, but you are just postponing the inevitable. When the tide turns, this formula reveals its hazardous nature as money becomes harder to secure.
Related: Coronavirus and a Looming Recession: How to Raise Capital in Uncertain Times
Moving forward, companies must focus on creating real value for the customer. A product must stand on its own, underpinned by a genuine business need and deliver outcomes that matter. It should be designed to withstand downturns and periods when businesses look for ways to trim their expenses. Building products that are too good to give up is the most straightforward way to hedge against future downturns.
Many founders I've recently spoken with, including Ronen Korman, CEO of Datorios, share this view. "Only great-quality products will survive the storm," Ronen said. "Building those is first and foremost a matter of increasing the investment on your talent. At the same time, it is important to streamline your overall spending and grow leaner and meaner, not skinnier... In times like these, companies must be fast, effective, agile, and obsessive over their product, clients, and talent."
Turning crisis into an opportunity
While the current market conditions leave much to be desired, savvy founders can still utilize some factors to keep their heads above the water and thrive. For example, layoffs and the Great Resignation could create a significant opportunity for companies to expand their talent base strategically. Stephie Knopel, Co-Founder of hiring AI company Unboxable, shared her take on the current hiring market.
"When a crisis rears its head, hiring doesn't completely stop," Stephie told me. "It's quite the contrary for some businesses: Experience from previous crises tells us middle-market companies are more resilient in uncertain times. They don't stop hiring. Rather, they capitalize on the opportunity to hire the talent they couldn't normally afford or attract."
Companies looking to build up their momentum despite the downturn must tap into the pool of talents laid off in recent months. They also need to get a clear sense of what qualities they are looking for and do more to find undiscovered leaders among the existing staff.
Some founders are less concerned with the economy's current state and prefer to focus on the bigger picture. The market will always go up and down. Some of the most fundamental, industry-shaping trends may expand into the future and give visionary projects momentum for moving onward and upward. Racheli Vizman, Co-Founder and CEO at SavorEat, argued that now is the time to be ambitious.
"While staring down the onset of a looming economic downturn, the typical and natural inclination is to slash R&D, cut spending, and curtail expansion plans," Racheli said. "To the contrary, as a nimble food-tech company amid the burgeoning Israeli food-tech ecosystem, we're doubling down on R&D and marketing and trying to accelerate our strategic growth plans with partners. We've got our eye on the long game, and the mega-trends of food sustainability, health and wellness, and personalization aren't going anywhere."
The commitment to playing the long game is commendable, as investors often want to see a vision, not just a product. Another lesson for prospective founders is that the market will always move in cycles. This doesn't mean innovation has to stop when bears take the reins. Sure, investors will hardly be as generous as they were, but innovative products built to deliver real value will always win their favor and wallets.
Related: Lessons for the Young Startup Leader: How to Get Through an Economic Downturn
