\n<\/p>\n
Everyone is talking about an economic crisis and asking how it will influence tech investments.<\/p>\n
The good news is we\u2019ve seen those kinds of crises in 2008. Before that, in 2000, in 1984, and a flash of it in 2020 (Covid19), and survived.<\/p>\n
The bad news is it is painful. It was painful back then and painful today.<\/p>\n
The ugly part with the bullish market in 2020-2021 and way over-inflated valuations, is that it will be very hard to return the investment to those who invested in an over-inflated market.<\/p>\n
The pretty part is that those who raised a lot of money and have figured out a way to keep it or reach profitability will win big time.<\/p>\n
To understand the startup funding challenges, you need to start with basic investors’ mentality. If you invested during 2020-2021 and in particular beforehand, then you have seen the value of your investment going through the roof, regardless if it was S&P500, Nasdaq, startups, or even more extreme cases like cryptocurrency, NFT, or any other mind-fart.<\/p>\n
If you weren\u2019t part of it, you have seen others making fortune through investments that perhaps didn\u2019t make sense. That drags people into the always-up bearish perspective of \u201cI\u2019ve made tons of money in investing – therefore I\u2019m a genius and I should be investing more into even more risky investments.\u201d Or \u201ceveryone is making money, I want it too.\u201d Or the most common approach of all, \u201cI\u2019ve made 20-30-40-50% on the stock market, I should take some profit and allow myself to invest in high-risk investments like startups or VC.\u201d<\/p>\n
Unfortunately, the bullish market era ended with a splash, and a bearish market took its place. Together with it a bearish market mindset. The profits people meant to use for investing in startups disappeared, or lost 25% on the S&P500 index fund. The investors don\u2019t want to sell while losing, or more commonly, they thought that startups are risky and dound out that S&P can be very risky.<\/p>\n Add to that the inflation and higher interest rates, and all of a sudden for potential investors getting a 4-6% interest rate on USD is not that bad, and it is risk-free.<\/p>\n The result is people are inclined to invest in a startup in a bearish market, and even those who made commitments to VCs prefer not to invest. I\u2019ve heard some VC partners quoting their LPs, saying that in the case of a capital call, they will keep their commitment, but prefer that you don\u2019t call them.<\/p>\n VCs on their side realize that, preserve cash for the existing startups, and refrain from investing in new ones.<\/p>\n For entrepreneurs \u2013 it is winter time. Raising capital is harder, longer, and results in way less during the winter. The good news is that there is always spring after the winter.<\/p>\n But investors are right. Winter is a bad season to invest in. In fact, the return on investment during other seasons is higher than the investment made in winter time, and the reason is the next round.<\/p>\n The next round is still going to be in the winter time or just at the beginning of the spring and insufficient traction (due to insufficient funding in the first place) will make it harder to raise capital and in many cases that will slow down the startup journey.<\/p>\n \u00b7 Solve a problem \u2013 solving a problem is the best way to create value. You need to create value in order to justify your existence. Your investors will give up on a company whose value is unclear.<\/p>\n \u00b7 Focus \u2013 do one thing and one thing only, don\u2019t spread. If you are trying to demonstrate product-market fit, don\u2019t try to build a business model at the same time, or don\u2019t try to go global. Serve the business, not the investor\u05e5<\/p>\n \u00b7 Adjust objectives and in particular adjust the organization to the objectives. At the end of the day, the most expensive part of the journey is the next month, when your organization is overinflated. It is still overinflated this month, in the next month, and the one afterward\u05e5<\/p>\n \u00b7 Aim for profitability faster. It may be your objective if it is feasible, but the closer you get there, the less burn you carry with you, and the available cash will last longer.<\/p>\n Think of the burn and run rate again. If your revenues per month are $200k and your expenses are $600k, and you have $5m of cash, your run rate is a year. This may not be enough to get out of the winter. But if you can turn revenues to $400k a month, then you have two years of run rate.<\/p>\n Adjust quickly, don\u2019t wait.<\/p>\n<\/div>\nWhat Can Startups Do? Go Back to Basics<\/h2>\n