The inevitable physics of economics is upon us — what goes up must come down — and we appear to be headed for the down part of the equation.
But all is not lost. If you need a reminder, Venmo, Instagram, Uber and WhatsApp all launched during the Great Recession of 2008.
When I think about recessions, I remember what an electrician said while working on my house during the dot-com blowup. I’d asked him if he was worried about the economy affecting his work, and as he drilled another hole for the wiring, he looked up at me and said, “Nah. A bad economy just weeds out the hacks.”
If your company is lacking basic business fundamentals and burning cash, well, maybe you’re in for a reckoning. But then again, maybe you always were. But if you have a well-grounded startup built on a good idea with a solid foundation, you can probably ride out whatever storm is coming.
The question is this: Are you building something essential at the core of your customer’s business, which Operator Collective founder and CEO Mallun Yen refers to as painkillers? Or are you building something less essential, which she calls vitamins?
Painkillers versus vitamins
“Companies building painkillers rather than vitamins, especially solutions that are technically hard or tricky to develop, or anticipate fundamental but yet-to-be-mainstream shifts in an industry, are particularly well positioned to weather the macro conditions that are out of their control. Painkillers include products that increase revenue or significantly lower costs in a tangible way,” Yen told me.
She said those startups can be in any category as long as they are helping companies work smarter, which is even more essential in an uncertain economy.
“For instance, we have one company we are investing in that enables customers to significantly increase their sales by enabling them to do things in a way that hasn’t been done before. Another is materially lowering cloud infrastructure spend — a pain point that will only increase for companies across the board as more data is stored in the cloud and corresponding queries and other analysis need to be run.”
Derek Zanutto, general partner at CapitalG, said that while many companies will experience some short-term hiccups due to market fluctuations, his firm still expects to see many grow and thrive over the coming years.
“Some of the greatest companies have been founded or emerged stronger than ever during weakened market conditions. I’m particularly bullish on startups that are helping enterprises harness the power of their data. Data, when leveraged well, can help enterprises both rein in costs and generate more money, making it, over the long term, a recession-proof business sector,” Zanutto said.
Soma Somasegar, managing director at Madrona Ventures, said his firm has been investing in intelligent applications, adding that regardless of what’s happening in the macro environment, they are sticking to the plan.
“We strongly believe that the future will be defined by intelligent applications,” he said. “These applications have machine learning models embedded that use both historical and real-time data to build a continuous learning system. They are the future of software and computing and an area we have been investing in for the last many years and will continue to invest in.”
Provable ROI will be key
Ed Sim, co-founder and general partner at Boldstart Ventures, is sticking with early technical founders that he brought to the dance, but that doesn’t mean he isn’t being more cautious.
“As far as types of companies, right now what I’m monitoring for is pullback in IT spending, and so far we have seen none. Cloud spending will continue to rise, cybersecurity is a must-have, and developer productivity are all areas that will be more insulated. However, I do expect growth slowing and some softness moving forward, so founders need to get ahead and plan accordingly,” he said.
Somasegar said he also sees some turbulence ahead, but whatever the economic conditions are, his firm continues to communicate to its startups in a consistent way about always staying focused on business fundamentals.
“We talk to our portfolio company CEOs and their teams to stay focused on what they can control and not what they can’t control. That means focusing on the customer and solving a critical pain point for their customers 10x better than what is otherwise possible. This also means having a deep understanding of unit economics, what drives growth and how to leverage that knowledge to build an unfair advantage,” he said.
He said staying efficient with your cash in the coming months is going to be essential and having some cash on the books will certainly help.
Sim said that as inflation rears its head, how you manage depends on your stage. If you’re pre-product, just keep your head down and build — “No product, no company,” he said. This echoes the advice he gave as the pandemic hit in March 2020; a similar dynamic is at play now as recession looms.
As for growth-stage companies with cash on the balance sheet from raises over the last 12 to 18 months, Sim said that they can watch and wait, and maybe cut back on non-essential costs. He said these companies may stop hiring depending on their business and external conditions, but the cash will help them get through this next period.
Not everyone gets out alive
Finally, there are companies that have already raised massive A and B rounds that haven’t yet achieved true product-market fit, and they could be caught between a rock and a hard place.
“Companies who raised massive Series As and Bs and rapidly scaled go-to-market and sales without true product-market fit: You can’t continue hiring more sales folks because you promised VCs growth when your reps are at 20% sales efficiency,” Sim said.
He said one thing is clear: We are moving from a period of growth at all costs to one where balanced growth will be favored by investors.
Yen said as an investor, she tries not to let the short-term economic climate affect her investing approach.
“Twists and turns inevitably happen in any business, in any market,” she said. “Strong executors have the ability to not only run things efficiently and control spend but prioritize building a strong culture. Great companies will see this as an opportunity to double down on their foundations, making sure their existing workforce is set up for success and be able to take advantage of these conditions to pick up strong talent who previously may not have been in the market.”
The economy is shifting fast beneath our feet, and it’s going to affect just about everyone. But whether you’re one of the hacks that get shaken out or the Next Big Thing will depend a lot on your approach to business.
Regardless, it looks like it’s time to buckle up, folks. We could be in for a bumpy ride.
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