Interviews, insight & analysis on digital media & marketing

How should startups approach the downturn in VC funding in 2023?

by Miguel Fernandez, CEO and Co-Founder of Capchase

The tech downturn is now in full swing with many major companies and startups are cutting back costs. As with previous events of this nature, VC funding has naturally fallen, impacting valuations and making it harder for startups to scale. However, the situation is far from bleak. 

Many sectors of tech – such as SaaS – are continuing to thrive. Funding levels, although down substantially on 2021’s figures, are still relatively high. Indeed, many of the layoffs that have been announced have been attributed either to overhiring during the pandemic or as precautionary measures should the wider global economy take a bigger hit than expected. Inflation level Fernandez, s also appear to have peaked at a lower rate and faster than many economists expected, which may mean that interest rates will also not rise much further. 

There is of course still a lot of uncertainty and consumer focused tech verticals are undoubtedly going to have a very tough year. Nevertheless, the majority of the global tech industry is built on solid fundamentals – it is now far more resilient when compared to previous recessions. For startups seeking funding, there are still plenty of options available if they take the right approach.   

Demonstrating strong unit economics and growth fueled in a healthy way is critical. Profitability is going to be the primary set of metrics investors care about this year. As a result, it becomes even more important to be extra frugal when it comes to budgeting. To do this the challenge lies in distinguishing between the ‘nice to haves’ and the ‘must haves’, and adapting your plan accordingly. Based on our research, for most companies this will mean continuing to invest in sales and marketing spend to maintain or increase market share while dialing down longer term investments. All of this should be done with a sharp focus on how any cost aligns to your wider business metrics – the end goal being to preserve your runway for as long as possible

Sync strategies

A mistake startup founders often make is taking a top down approach to runway preservation. This can lead to myriad difficulties as senior management find their approach at odds with their department heads and wider team. Imposing broad cost saving targets or efficiency goals isn’t enough. Any strategy has to be incorporated into the plans and targets of each department, and ideally, individual. That way every team member is pulling in the right direction. They know that their performance is being measured on updated metrics that take into account runway preservation. The added virtue is that this inevitably leads to innovation and leaner working as team members are incentivised to root out efficiencies. 

Plan for risk

Even with the most meticulous, well-designed execution strategy, every new product or business move comes with a certain level of risk. Make sure you plan for it. Identify key risk areas well in advance – those types of marked moments which signal that your original plans may need to change, shift or need a completely new focus. This should be underscored with gating items and milestones for further investment around new products or tech, ensuring you only buy in more money at a comfortable stage of growth.

Reimagine funding 

Remember VC financing is not the only game in town anymore. There are now a huge range of different funding models available for startups. In fact, our own research shows that a substantial number of startups have pivoted to debt and alternative financing as part of their capital stack due to the fall valuations making VC funding a much less attractive route due to associated high levels of equity required. 

More entrepreneurs are also focusing on purpose-specific financing solutions – landing smaller cash boosts to solve an immediate problem or exploit a short term opportunity such as client conversion, reducing friction or shortening a sales cycle. ‘Buy now, pay later’ are one of the most popular examples of this approach. 

Determining the right funding strategy for your startup means being fully aware of all the financing options that are available. 

Keep on 

Lastly, although it may be hard, it’s important to try to not buy into all the headlines and ‘expert reviews’, much of which may be designed to scaremonger and capture your attention. This is, after all, not tech’s first crash. And just like tech recessions before, it will come to an end probably sooner than you think. The likelihood too is that it will drive best practice, as stakeholders and investors gravitate to those companies who remain vigilant and maintain growth in a healthy, measured way.