All startups have to navigate the turbulent economic climate of 2023. But whether your company can survive depends on a lot of factors, including the viability and originality of your idea and the amount of cash you have in the bank.
There are ways to merely survive, of course, to hunker down and weather the bad economic cycle. Companies with a long runway can ride out fluctuations in the market, but you have to have an idea that solves a real business problem to truly grow and thrive.
At the beginning of the pandemic in 2020, many VCs extolled the virtues of “just putting your head down and building a product.” If you’re at that stage, it’s not a bad way to look at this moment. Try and ride out the storm in development, and by the time you have a product ready to go to market, things will have improved.
But if you’re trying to sell or maintain your position inside a customer base, it’s a different story. Despite multiple CIOs saying that they would likely keep enterprise spending the same — or increase it — in 2023, that doesn’t automatically mean good news for startups. You still need to convince the key decision-makers that your product is worth keeping in the mix at a time when every line item in the tech budget is under intense scrutiny.
Two trends in the enterprise startup space have emerged from this environment: There’s a swath of niche startups — with VC funding in hand — targeting specific problems that companies face. And there are existing companies that are expanding to look more like platforms than single-issue solutions.
So does that mean 2023 will be a great year for enterprise startups that have expanding product suites and long-term contracts locked in? Will one-trick startups struggle — or even fail? As expected, it depends, in this case on which part of the enterprise stack a company operates in.
But there are perhaps more important questions: How crucial or unique is your product — what makes it stand out? And will you survive the cut? We talked to several early-stage investors about the kinds of startups that are in good shape in spite of the downturn and which ones could be in for a rough ride in 2023.
Carefully reviewing spending
As companies study their budgets, they are looking at places to cut without hurting what they do well. Loren Straub, a general partner at Bowery Capital, said that despite potentially spending the same amount of money, all companies will be scrutinizing their existing enterprise contracts, and any potential new ones will be put under a microscope. “People are managing their budgets so near term, on a quarter-to-quarter basis, is my understanding,” she said.
As Sharon Mandell told TechCrunch in December, even so, you have to cut carefully. “So when you get into [this kind of economic] environment, where you might see some constriction, you want to be able to do things more efficiently. And if you have to get hard on costs, you don’t want it to be in the growth areas of your business,” Mandell said.
Companies will be looking for startups that offer them something they can’t get anywhere else. In some sectors, expertise really does matter, and some of these smaller or niche startups won’t get hit too hard. One such area is cybersecurity.
“Will there be a shift to your broader platforms that do some things similar? I think you have to go to a business unit level and really get into the weeds,” Straub said. “There are just some areas like cybersecurity where you pick and choose. It would be hard to get on one platform.”
Jon Lehr, the founder and general partner at Work-Bench, doubled down on cybersecurity and said some of the subsectors within that category will be relatively safe, too, such as incident management. He noted that a company in Work-Bench’s portfolio that specifically focuses on that category is still seeing healthy demand.
But on the opposite side, many one-feature startups won’t be able to compete with the companies that have expanded into that space — even if the smaller shop’s product is actually better.
Kobie Fuller, general partner at Upfront Ventures, said that after several years of living in an investment fantasyland where money and valuations were plentiful, it’s time to get back to reality. “Now we’re living in the real world where you need to build a good business with good unit economics and realize that venture financing is not going to be thrown at you for cheap as hell terms — and just get to work,” he said.
For his part, Fuller said he won’t invest in a company that does just one thing. “I don’t like to invest in one-trick ponies.
“I get excited by platform companies that have platform-based approaches, whether it’s a horizontal software application or vertical SaaS in an industry where it’s totally transforming the way people accomplish something,” he said.
For the smaller startups that find themselves losing traction or investor interest this year, there is a silver lining: These same investors expect this year to be record-setting for M&A. While some startups might get snatched up by private equity firms or public players, many will find a soft landing becoming one of those features at a larger platform startup.
But if that’s something you’d like to avoid, you need to think bigger. Instead of a single-feature product, build a broad platform-driven solution that’s so critical for your customers that they’ll still be willing to buy it, even from an early-stage startup.