Startup funding continues to dwindle and layoffs keep making headlines as 2023 nears. And yet, pre-seed and seed companies don’t seem to be enduring the same state of panic as their more mature startup peers.
A recent survey of 450 early-stage founders in the U.S. and Europe by pre-seed-focused January Ventures found that despite current market conditions, many startups in their earliest stages still seem to feel largely insulated. Most don’t plan on the current macroeconomic environment changing their growth — both in terms of headcount and projected revenue — all that much.
For one, they aren’t finding today’s market conditions to be as big of a catalyst as the pandemic-induced downturn in 2020. The survey found that only 15% of the founders thought the current downturn would have an impact on their revenue — of course, we should note these are early companies likely have limited revenue to begin with — with 48% saying it would have little to no impact at all.
Because of this, only half plan to cut costs in response to the current macroeconomic downturn, compared to 2020, when 81% of companies reported doing so.
January Ventures founding partner Jen Neundorfer said that she wasn’t surprised to see a more intentional approach to the downturn this time around — many early companies cut quickly in 2020 and felt burned by their decisions later on.
“The data is proving that early-stage founders are seeing a more gradual approach to the downturn,” she said. “It’s in contrast to some of the memos you see from the Sequoias of the world that say, ‘cut immediately and cut deep.’ Early-stage founders seem to be taking a different approach. They are in a really different phase in their business.”
These startups aren’t looking to let the current conditions have a meaningful impact on their hiring plans, either. Their survey found that only 6% of pre-seed and seed-stage founders have reduced headcount, with a mere 12% planning to decrease hiring.
“The data shows that there is a lot of nuance to how companies at different stages respond to the same macroeconomic situations,” Neundorfer said. “How does this data help us going into 2023? It shows the nuance you need when you translate the advice that people are giving at the high level to what that means for an early-stage startup.”
What makes these responses all the more interesting is the fact that the vast majority of startups that answered the survey don’t have material runway and also believe VCs are slowing down their deployment.
The survey found that more than 80% of these pre-seed and seed-stage startups don’t have more than 12 months of runway. Plus, 43% said they think investors are slowing down, with 38% saying they think investors were more focused on backing people they know.
January founding partner Maren Bannon said that it isn’t super surprising considering the nature of pre-seed funding.
“The other thing to add is that a lot of pre-seed startups raise a small amount of funding, [meaning] that long runway isn’t available to a lot of startups at the early stage,” Bannon said. “It’s a different set of decisions for them.”
While all this makes sense, it was still interesting to see that despite not having tons of runway in place — and thinking that the VCs from which they could raise said runway were slowing down — these startups aren’t panicking as much as the greater startup ecosystem is. Maybe they are still largely unaffected by the bigger trends, but if 2023 continues in the downward direction that emerged this year, this neutral sentiment may be confronted with a rude awakening, especially at the fundraising table.
But not everyone feels so blasé heading into next year. While early-stage founders in general aren’t freaking out, women founders are struggling. The survey — in which 50% of the startups included were founded by women — found that 70% thought that their gender was holding them back, the highest since January Ventures started doing the survey in 2019.
“The reality is there is a lot of lip service,” Neundorfer said. “The networks in venture are still so narrow. For us, that’s really sobering data to see.”
With record dry powder heading into 2023 and valuations for these early startups continuing to climb, we’ll see if they were right not to panic this year. But we’ll also see if they should have paid more attention to how their larger peers responded.