“Software is eating the world”, said Marc Andreessen, and the digitisation of the economy is not going away.
How are you coping with a funding downturn and plummeting tech stock valuations?
On 1st July 2022, the Wall Street Journal reported that Klarna, a ‘buy-now-pay-later’ entity, was trying to raise fresh capital at less than a fifth of its peak valuation of $46bn.
As Klarna attempt to raise funds, the long startup boom is going through a sharp correction and the surfeit of capital is rapidly drying up. The NASDAQ index, which is weighted towards tech companies, has fallen by nearly 30% so far this year, in a gruesome reckoning.
Core economic metrics of rising interest rates and inflation, and the war in Ukraine are causing a wave of uncertainty to wash over the globe.
So, given the headwinds don’t look friendly, what are the immediate priorities for tech startups seeking to make their first foray into the early-stage funding market?
📈Sensible valuations. Don’t get greedy.
💰Attract investors with focus on determining the economic drivers of success, not outrageous revenue projections.
♟A clear growth strategy. Think of scaling as building the base of a pyramid, the foundation upon which everything is built, and you know that it will hold.
📊Set and hit your (proper) metrics. Don’t ignore your cash burn as ‘all startups lose money’, show a dashboard of KPIs and a plan to get to monthly cash breakeven.
⚠️Know the risks in your business model. Your strategy is not to wish and dream of becoming a big fish too quickly, initially pick a small pond, engage with the smallest viable audience, and gain the reputation and trust you need to move to bigger audiences.
🎇Have a vision and purpose, but don’t hallucinate.
🕺Be an agile leader.
The shift in Klarna’s valuation is entirely due to investors suddenly voting in the opposite manner to the way they voted during the past few years. But it doesn’t have to be as bleak. Surely, questioning the true worth of many tech businesses is a good thing. It will level the competitive playing field. Tech companies were using high valuations to build unsustainable businesses.
So don’t ignore the reality of what we see unfolding, but equally don’t sit back and let the tidal wave of pessimism wash over you. Now is the time for high-growth tech startups to prepare. The unicorns have shown themselves to be unsustainable, but they are pointing the way to vacancies in investors’ portfolios.
In the long run, the big bets of the past two years lead to huge but unsustainable valuations and an emperor’s new clothes scenario. Now’s the time to get sharp elbows and get yourself noticed, but with a more grounded approach.
Thank you Ian. A great and very relevant article. You are a shining beacon of wisdom from the tech lighthouse. 👏