In 2021 and early 2022, startups experienced a time of wild optimism. Capital was still plentiful and cheap, and enterprise buyers were heavily into experimentation, making it a great time to be a startup. But quite suddenly in 2022, the wind shifted, inflation reared its head, the Fed raised interest rates multiple times, and money became much more expensive. Buyers got uncomfortable, buying cycles suddenly were extended, and startups began to feel the pinch.
There is a simple law of economic physics: In general, the economy goes up, goes down and eventually bounces back up again. But as we approach the middle of the final quarter of 2023, and some of the economic signals have improved, is it reasonable to expect that we’ll be seeing a recovery in which startups can once again thrive?
It may not be that simple this time. While IT budgets are projected to improve in the new year, it doesn’t necessarily mean that startups can take advantage of that money. Don’t forget that many major tech vendors raised prices this year, further complicating things for startups looking to get a piece of that action; companies may be forced to put more money into existing line items.
All of those factors and more have led to an ongoing shift from growth to efficiency, forcing many startups to tighten their belts to cut costs. The primary way to do that has been laying off employees and generally trying to get as lean as possible, but that, too, comes with its own set of problems. Startups, especially those in the earlier stage, already have an all-hands-on-deck kind of approach, and cutting employees means having to do the same amount of work with fewer people.
As we approach 2024, what does it all mean for startups that managed to ride out this year? Can they expect things to improve in the coming year, or could it prove even more difficult than the prior one?
It depends who you ask.
Rough seas ahead
Scott Raney, managing director at Redpoint Ventures, has been at this for over 20 years, and he says the environment we are seeing now is less about an economic downturn than a market correction from unrealistic valuations in 2021. We are simply seeing a return to more rational levels.
“The problem is we have a whole set of companies that were founded at a time where, because there was a bubble, and they were able to build a business that’s very difficult to build under normal times, or they were operating their business in a way that assumed that they would always have access to plentiful capital, and now they’re going to have access to a regular amount of capital,” he told TechCrunch+. Without additional capital and not enough revenue to fill the gap, he believes it could be tough going for startups in this position.
That means, in his view, there isn’t going to be a snapback, at least for companies that match this profile. That’s because these companies are overvalued, and it’s not likely they can generate enough business to compensate for that.
“It’s not like we’re at a recessionary level or anything like that,” he said. “It can trend up a little bit, but it’s not going to snap back. And if it trends up, it’s mainly because there’s a set of technological disruptions that lead to the need for companies to open up their pocketbooks and spend more money than they might under normal circumstances.”
A reset rather than a recession could bode poorly for certain companies. “While there are positive signals across the economy and we are likely to avoid an ‘official’ recession, as a tech sector, we’ve still experienced a significant reset in expectations and tolerance in a way I think is long-term very healthy,” said Lily Lyman, an investing partner at Underscore VC in Boston.
“We are likely to see companies struggle next year to hit targets across efficiency and growth. Sales cycles are slower. Budgets are tighter. Risk tolerance is lower. We will remain in an environment of ‘do more with less,’ and those who can will get to survive and perhaps be rewarded for it.”
A more positive view
But not everyone is so pessimistic about 2024. Sure, some startups could continue to face turbulence, but those solving fundamental problems in a unique way might fare better.
Loren Straub, a general partner at SaaS-focused Bowery Capital, told TechCrunch+ that she’s more optimistic about how her portfolio companies will fare in 2024 compared to this year — when it comes to selling to enterprise customers, that is. She said that multiple Bowery portfolio companies still added customers during this tough environment, and she doesn’t have a reason to think budgets will shrink in 2024.
Even if budgets are tighter, they may only be so if compared to 2020 and 2021. “It’s worth mentioning companies still spend a huge amount of money on IT and tech,” said Christoph Janz, a managing partner at Point Nine. “Cloud is still growing. Most metrics only look bad, or are going down, if you compare them to what it looked like two years ago. The long-term trend that companies spend more and more on software and IT is still healthy and will continue.”
Both Janz and Straub said that the startups building what corporate customers need to have, versus a feature that would be nice to have, won’t have too much of an issue. Categories including security, incident management and vertical SaaS — depending on the industry it targets — still have strong demand in any market.
“Our vertical SaaS businesses, their software is just such a need to have and there is only one startup usually [in the category], compared to some of our horizontal SaaS businesses,” Straub said.
SaaS startup selling success in 2024 will also be determined by which types of potential customers are being targeted, said Work-Bench co-founder and general partner Jon Lehr. Companies targeting other startups will still struggle — in addition to those still reliant on product-led growth — but those targeting mid-market or Fortune 500 companies, albeit harder to sell into to begin with, will see more success, he said.
The SaaS startups that held layoffs may also have leaner sales teams heading into 2024 and won’t have the resources to sell into multiple types of business. But Lehr thinks this is a good thing.
“[Startups] needed to be focused on maybe two of those three lanes before; now they are going back to one. In a way they are being forced to focus,” Lehr said. “There are smaller teams and because of the risk they are more efficient, and they are getting more creative in how they go after the customers. [Startups] focused on one lane are doing better.”
No one expects any drastic or positive changes for multiples or fundraising next year, but they do think that M&A will pick up, which will be good for startups that end up struggling to raise or that are looking for a soft landing.
“There are a lot of buyers in this market but not a lot of sellers,” Straub said about 2023. “[Buyers] are excited that multiples have come down. I think a lot of these [companies will] come back around again in 2024 with more willingness to settle on a price. There are a lot of meet and greets and diligence getting done, but people are walking. I think that’s going to change.”
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