How Startups Can Navigate Uncertainty, AI and Investing in 2023 This article discusses how entrepreneurs can best navigate operations, hiring and fundraising this year.
By Danny Cortenraede Edited by Chelsea Brown
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Through every turn of the century, there was a rotation of what the "It" industry was. The first agricultural revolution gave birth to the first reminiscence of modern society. In the 1800s, there were industrial machines. The internet dominated the late 1990s and has continued to make its mark until the present day. Today, we're witnessing an unprecedented era where tech stocks are at an all-time low — more than 20% was wiped from the NASDAQ last year, and nearly $3 trillion of the S&P 500's market cap drop was from the tech sector.
Can this be the fall of the short-reigning "It" industry?
Simultaneously, a flurry of activity and media has flocked toward the growth of nascent AI technology, such as Open AI, which has surpassed a whopping 57 million monthly users for its product, ChatGPT. Since then, AI wars have ensued between Google and Microsoft in the race to develop superior AI.
The rapid advancement of AI will inevitably change how the modern workforce operates, but what does that mean for the overall fundraising landscape? Despite the lower fundraising rates compared to previous years, entrepreneurs still have opportunities to capitalize on this unique period.
Related: Building a Business? Here Are 4 Common Challenges You'll Likely Face Along the Way
Funding slows, but not at a halt
Despite a sluggish funding period, investors managed to put $100 billion more into tech than in 2020, according to Crunchbase data. Venture capitalists will continue to fund companies with long-term value based on quantifiable measures. This also means that requirements will tighten around seed funds and up; you'll see less hubris in the market compared to Covid days.
Although fundraising has slowed, exits and mergers and acquisitions have skyrocketed. With exits increasing by 116%, it shows the natural gravitation of startups toward more stable companies in uncertain periods. It's also an opportunity for investors and companies to buy startups at a discount.
Funding for applicable AI (healthcare, fintech, retail) is growing steadily, while other segments are facing a steep decrease in funding. According to the CB Insights State of AI report for Q2 2022, global funding for AI startups dropped for the third consecutive quarter with a 21% decrease quarter-over-quarter. Funding rounds of more than $100 million have dropped by a third quarter-over-quarter. A few anomalies exist, such as Anthropic Labs and Inflection AI, raising $580M and $225M for large-scale machine learning and research. Retail AI increased by 24% in funding, while healthcare AI decreased by 20%. Fintech AI maintained its funding levels, with Taxfix raising $220M.
The pivot from growth to profitability
After the windfall from Covid — we're witnessing a pivot from growth to profitability. This is happening in Silicon Valley and on a global scale. Elon Musk has demonstrated this to the extreme with Twitter by cutting half of the workforce. In a few decisive moves, he's paving a new standard for how profitable a new tech company should get. A 10% to 20% RIF (reduction in force) will no longer suffice; an enterprise software company will need to reduce at least 30% to 40% to remain profitable.
Private equity companies have a rare opportunity to concentrate more on small and mid-cap companies. The realization that you can do away with 40% to 50% of the workforce and still keep a product running is promising. Company owners should look carefully into their projections and aim to have enough runway for the next 18-24 months. They need to modify their strategies quickly, as procrastination can be detrimental to their immediate and long-term viability.
Related: How to Know If Your Tech Startup Is on the Path to Profitability -- or Not
How startups can leverage big layoffs
It's open season for companies, but that also means that the talent war is heeding on its heels. To preserve or attract leading talent, tech startups must meet the growing demands of the modern worker. This might mean putting more emphasis on work-life balance, social and health benefits, lenient time-off policies and last but not least, diversity, equity and inclusion practices (DEI).
In 2022, the Google search phrase for "companies with a social purpose" increased by 132%. We're undergoing a period of growing economic disparity in wealthy nations, social division and ensuing geopolitical tensions. It's natural to assume that people are looking for workplaces that provide psychological safety and satisfy a need for purpose. As tech leaders scour the landscape for the best talent, this is something to consider. For venture builders, access to fresh talent with technical abilities can help supercharge innovative startups.
Agile movements, long-term consequences
Despite the ominous economic environment, there are a few things for startups and investors alike to consider. For venture builders, a downturn season is an excellent time to recalibrate and stress test the resources needed to execute the best results. It's a period all about scale, not growth.
The anticipated decline in economic growth, a less robust job market and a lack of inflationary pressure is expected to halt global interest hikes in 2023. Initially, investors may view this development favorably. However, past experience has shown that the economy tends to suffer the most harm once interest rates have already gone up.
It's safe to assume we don't expect a downturn in the magnitude of the Great Recession. Corporates and households are currently running a better surplus than they have prior to any recession. From around 2020-2022, the banks saw the lowest loan-to-deposit ratio in modern banking years. In an interest-free world, deposits grew at unprecedented rates. This means there's still plenty of capital to be deployed into the market. Through a correctional period, only the startups with the best products and talent will prevail, while the rest will settle into the dust.
