What should founders do when startup funding is slowing down?

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Sep 29, 2022
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Global funding is slowing down due to the extraordinary monetary and fiscal stimulus most governments used to fill the large demand the pandemic created leading to distortions in the supply chain and pricing as the economy reopened, and demand topping over supply. Additionally, the Russian-Ukraine war has contributed to inflation with a rise in interest rates. Moreso, declining startup valuations can also be attributed to the pullback by investors. 

Upon reading Ycombinator’s memo to entrepreneurs, one will wonder if and when things will get better. To understand the memo better (especially that stating that recovery will take a while),  I had a conversation with the founders’ community. This was to aid the understanding of what it was like for founders building in ‘times like this’, what they think will happen and their plans to survive and grow in spite of the new market reality. As a follow-up to the conversation, I reached out to Gaston Bilder, an active, impact investor to get his perspective on what founders should do in the light of the new situation. 

This blog post is a summary of our conversation, and hopefully, it helps shed clearer light on the right steps to take and how to not just survive but thrive regardless. 

What founders should do until the market recovers

When looking to find solutions for a problem, it is important to examine history, trends and patterns and draw inferences from them. Gaston started by pointing out that recessions and market down-turns are not new. He made particular references to 1997, 2000 and 2008 market crashes with that of 2008 placing a hold on startup funding. One thing is common to these 3 market downturns- recovery. Gaston mentioned that for every crash, the market will eventually recover. Founders are to remember that in spite of the recent market conditions, there will definitely be a recovery. 

What then should founders do while stocks are crashing, investment is coming in trickles and the situation, not likely to improve in the short term?

Gaston pointed out that in conditions like this, it is important that founders keep the following in mind as they build and grow

  • This is not a time to panic, but to pause and think carefully:

Taking out time to pause and think will make a great difference in preparation. Preparation allows you to realign your focus and see weak spots in your competitors' businesses that can help give your business an edge over others. Taking a cue from this HBR publication, 9% of the companies that fared well during the 1980, 1990 and 2000 recessions, flourished and outperformed their competitors with an increase in sales, profit and earnings throughout the period and beyond. So much of winning - surviving in these uncertain times, depends a lot on preparation. 

  • This is the time to prepare for the worst:

This statement does not imply doom but is rather a piece of advice to founders to be more prepared to last beyond the current conditions. Gaston’s counsel coincides with that of YC advising founders to cut expenses and focus on extending their runway. This means that most startups will have to focus on just one thing - survival and take measures such as freezing new hires, putting a stop to experiments on new ideas and business lines and simply focusing on profitability. 

  • Startups should be more concerned about how to raise money and centre on cutting unnecessary costs and on survival. The goal should be to maintain the current cash flow and ensure that the business does not run out of cash.
  • For founders, it is time to focus. Even when there is enough revenue for survival, the goal should be innovation. Gaston added that It is founders who are adaptable that will thrive and not necessarily the smartest. This quote on adaptation by Charles Darwin which states that ‘ it is not the strongest of species that survive, nor the most intelligent, but the one most responsive to change emphasizes Gaston’s better. 

Adaptability then becomes a competitive edge that aids founders to then zero in on areas where big players are freezing, and establish their niche there. This gives them more market returns and shares even while building in the current market conditions. 

  • More focus should be laid on revenue and earnings. Revenue earned should be reinvested into the business for at least the next 24 months, as durable growth with improvements in profitability is always the right track to take. Founders are to invest in stringent financial management, ensuring that they do not run out of cash, and consider marketing and customer acquisition budgets and costs as secondary. 
  • Fundraising might prove to be a bit difficult and valuations will tank but however, slowly. However, this will open up more connections between public and private markets. 

Regardless of the predictions and the present market position, our focus at Aidi during and beyond this is to help founders who are building a new business, and those who are pivoting access support from a network of business angels. To get started, please sign up on the website, create a  profile and book an office hour slot.