In Q1, VC funding was down across every stage between 44 and 54 percent, year over year, signaling a continued hesitancy to invest in unproven ideas. As a result, funding announcements, once the unstoppable clickbait of the tech world, have dwindled alongside a broader cultural shift and a change in the dialogue around what makes for a successful startup.
When money was more accessible, infinite enthusiasm greeted the spinning up of new ideas and celebrated the capital they raised, regardless of their viability. With fewer funding announcements to report, however, there’s been greater scrutiny and a mandate to look at startups with a new lens: Are they solving a real customer or societal problem? Is this the best team to build the solution? And, even more importantly, do they have traction to not only grow but become profitable over the long term?
In this current environment, startups can actually take advantage of the slowdown and get back to basics instead of worrying about the next funding announcement. Here’s how.
What Should Founders Do During the Downturn?
- Build the best product possible.
- Obsess about a path to profitability.
- Experiment (again and again).
- Maintain focus even after the rebound.
Build the Best Product Possible
In 2021, the bar for fundraising was lower, and startup financing hit record highs. Funding rounds became a status symbol, the ultimate mark of success. But fundraising is a means, not an end. You raise money to build your product to serve your customers, not just to talk about how much you raised. So, the one piece of good news from the recent retraction in investment is that founders can focus on building instead of getting distracted by the incessant parade of funding announcements.
Building means clearly defining the problem you’re trying to solve and diving into research and planning. Creating a plan with clearly defined milestones that work for your team and your company first, rather than solely for investors, will help to focus efforts on your impact. Ultimately, you will deliver a product that solves the core problem you identified rather than just raise — and burn through — a heap of cash.
To build efficiently and without burning money, plan to reach your MVP and launch early in order to get feedback from users in the real world that will help you determine whether or not you need to adjust your product roadmap. Our studio, Wilbur Labs, encourages launching as early as possible to test and engage directly with customers.
Having customers who will vote with their wallet or their time for your product is the best early validation you can get and a far more important benchmark than raising cash.
Obsess About A Path to Profitability
Growth at all costs is over and, without an unlimited runway, founders need to focus on getting to product-market fit and generating revenue. Businesses eventually need to be able to stand on their own, without annual cash infusions. If you’re just chasing a fundraising headline and that next round, you’re not thinking long-term enough. Instead, focus on your path to profitability and generating healthy returns over time.
Although you don’t have to be profitable from the outset, a company should be able to weather economic headwinds. Until you are cash-flow positive, keep costs low wherever you can so you can allocate investments to the areas that matter most. When we were just starting out, we worked from the couch, saving money on office space and headcount. Our portfolio companies perform a bottom-up expense review monthly to reduce waste and review any recurring expenses. Last, before building a team and expanding, meticulously consider the roles you need to get to the next level. You should consider if each role needs to be part-time or full-time and if you can work with a contractor to accomplish what you need. In the end, healthier cash flows give founders the freedom to reinvest in the business, continue innovating, and grow along a healthy timeline, without unnecessary pressure from external investors.
Experiment (Again and Again)
In a less frenzied funding environment, the companies that can demonstrate resilience and keep making progress against their goals will stand out. There is no such thing as overnight success; growth stems from years of deliberate experimentation and relentless iteration toward the right solution.
Embracing a culture of continuous improvement and agility helps organizations stay ahead of the curve. By continuously adapting and trying new solutions, businesses can identify how to solve customer problems as best as possible and grow revenues in the process. For startups who have the ability to grow tremendously quickly given their lean starting point, a single experiment or new approach may drive surprising results and outpace any macro headwind. For this reason, fostering a culture of experimentation is the key to measured improvement over time, and is the biggest propeller for outsized growth in both good times and bad.
Companies that make use of a downturn to improve their products and services will be better positioned to gain market share over time.
Maintain Focus Even After the Rebound
When the market rebounds, we can expect a resurgence of funding announcements in the tech news. Chasing headlines will become tempting once again.
Although capital can present opportunities for short-term gain, founders should stay focused and continue to prioritize building great products that solve customer problems. By prioritizing product excellence and keeping their heads down, founders can build a solid foundation for long-term success, independent of short-term market fluctuations.
Cash is important, but founders should view it as a tool to support and accelerate growth rather than a substitute for building a strong and sustainable business. Companies that launch during this downturn will always have a unique edge because of the determination and grit they had to develop at the outset. This will serve them well over the long term, even when funding announcements start to proliferate again.
