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The Fast Company Executive Board is a private, fee-based network of influential leaders, experts, executives, and entrepreneurs who share their insights with our audience.

It’s time for startup founders to face reality

While this may seem like a scary time for startup founders, current market conditions actually provide a lot of opportunity.

It’s time for startup founders to face reality
[ladyalex / Adobe stock]

For the last decade, startups have been enjoying an unprecedented bull market that has been propped up by U.S. monetary policy, direct cash payments, and other government spending. Meanwhile, financial experts have been predicting that the tech bubble is on the verge of bursting. While those predictions have been wrong for nearly a decade, they may finally be right. The combination of high inflation, rising interest rates, broken supply chains, the war in Ukraine, and a host of other issues make this correction a little different. The tech-heavy NASDAQ is down almost 30% this year, IPOs will likely be down 70% by the end of the year, and the effects are just starting to be felt in the private markets.

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While this may seem like a scary time for startup founders, current market conditions actually provide a lot of opportunity. A recent conversation between my team and the CEOs and CFOs of our portfolio companies brought up some important points relevant to startup founders.

BE REALISTIC ABOUT RUNWAY

Founders need to start focusing on fundamentals, especially how much cash they have on hand and how long that cash will last. My team and I advise our founders to think in terms of a traffic light: green means go, yellow means caution, and red means stop what you are doing immediately.

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If you do not have the runway to get you through the end of 2023, then that is a red-light situation. If you have runway through 2024, then that is yellow. And if you have runway through 2025, then that is green, meaning this could be a great time to buy competitors or hire talent from major industry players that are laying off employees. But if you are facing a red light, then you need to start making several different plans to increase revenue, reduce costs, and/or raise money to get you safely into 2024.

COST OF CAPITAL IS INCREASING

Startups needing to raise money will likely face a tough few years. In fact, if you are able to raise a flat round right now, then you should be thrilled. Otherwise, surviving the next three years should be your goal. A founder of a growth-stage startup will need to greatly reevaluate the terms and valuation of their upcoming funding round, as any previous forecasts should be thrown out the window because they are meaningless in this new environment.

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For example, my team and I spoke with the founder of a company in late 2021. At the time, we were looking to invest in the company at around a $400 million valuation. The founder already had a term sheet and was in a strong position to negotiate. But over the course of about 90 days, another investor pulled their term sheet and negotiations ended up at around a $150 million valuation. In a single quarter, the company’s valuation dropped 62.5% despite company fundamentals remaining strong.

These are the types of headwinds that founders should begin preparing for now.

GROWTH AT ALL COSTS WILL NO LONGER BE REWARDED

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These days, investors are looking for more certainty and safer places to put their money. A startup founder’s top priority should be extending runway, not increasing their company’s valuation (just think of the various founders who have been made infamous in series like “Super Pumped” and “WeCrashed,” who abandoned responsible management for the sake of growth).

If you have a path to profitability, take it. Founders should look to reduce marketing costs, slow R&D, and freeze hiring as quickly as possible.

NOT ALL STARTUPS WILL BE TREATED THE SAME

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Over the next 12-18 months, expect some sectors to be impacted more than others. If you are in competitive spaces like fintech and SaaS and you’re not generating strong revenue, then these problems could be even more pronounced.

In fact, we’re already seeing this play out. Klarna has announced it’s laying off 10% of its workforce, Bolt has laid off 100 employees and counting, and Fast already closed its doors. I expect to see more startups in these spaces shed employees—and potentially even go under.

FOCUS ON YOUR PEOPLE

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Navigating a fraught economic period can be unnerving for employees, which is why you need to clearly communicate the health of your company at all times.

While other means should also be considered to reduce costs, a round of performance layoffs shouldn’t be off the table. Many companies grow too quickly and onboard too many people, leaving them in a weak position when markets correct. Founders owe it to their employees to make sure the company survives. Layoffs are often needed, yet occur too late. The sooner such decisions can be made, the sooner you will be in a stronger position to return to normal hiring practices.

PUT THINGS IN PERSPECTIVE

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As we try to survive yet another economic downturn, it’s helpful to remember other volatile corrections: 2001’s “dot-com bubble” and 2008’s housing crisis. While many founders may not have had to navigate those recessions personally, the lessons of the COVID-19 market shock should have prepared most founders for this new era of volatility.

I can’t predict the markets. No one can. However, founders have an opportunity to emerge from this downturn stronger than ever. Some of the world’s biggest companies emerged from the dot-com bubble (Google, Amazon) and the 2008 recession (Meta, Uber, Square). Founders should take decisive action now so that their companies can survive whatever the markets throw at them during what’s to come.


Dakin Sloss is the Founder and General Partner of Prime Movers Lab, the world’s leading partner of breakthrough scientific startups.  

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