Tech startups have gone through a major mindset shift in the past few years. The era of growth-at-all-costs and easily accessible venture capital is over.
The focus is now on demonstrating the ability to grow — but in a profitable and efficient way, without the need for additional investor dollars.
“Given that venture purse strings are tight, we are running Kevala to turn profitable on our terms,” said Todd Owens, co-founder and CEO of the Seattle-based staffing software startup. “We are still investing, but we scrutinize every single investment.”
Higher interest rates and persistent inflation, among other market factors, caused venture capitalists to put the brakes on investing throughout 2023, following record levels of startup fundraising in years prior.
In the first quarter of 2024, quarterly deal value hit the lowest level since 2018, according to PitchBook.
“Only high quality companies with solid unit economics, a strong team and differentiated products can obtain equity financing in the current environment,” said Kaidi Gao, a venture capital analyst at PitchBook.
And even for those that can raise more capital, it’s not always advantageous. Nearly a quarter of new deals in Q1 were “down rounds,” or raised at lower valuations compared to previous financing infusions, according to Carta.
“Today’s fundraising environment is still quite uncertain,” Kellan Carter, founding partner at Seattle-area VC firm FUSE, said via email. “Founders have essentially three financing vectors — raising external capital, raising capital from insiders, and reducing burn (fund business with revenue) to become default alive.”
Y Combinator co-founder Paul Graham coined the term “default alive” in 2015, to describe a business that doesn’t need new financing to grow.
“Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left?” Graham wrote in 2015. “Or to put it more dramatically, by default do they live or die?”
Carter said getting to default alive allows for a “sustainable and self-sufficient growth trajectory and driving to an exit in a timeline that makes sense for the business.”
Keeping a close eye on business fundamentals helped Pulumi grow in a sustainable way over the past few years, said Joe Duffy, CEO and founder of the Seattle-based cloud infrastructure startup. The 7-year-old company raised $41 million in October.
“Eventually a business needs to make more money than it spends, and allocate that profit to responsible growth and/or shareholder returns — a fact many forgot about during the growth-at-all-costs era,” Duffy said.
Some companies haven’t been able to survive. Seattle startups including leadership community platform Round, camper van rental business Cabana, and digital memory archive company Lalo all shut down in the past year, citing an inability to raise more cash as a reason for their downfalls.
In one of the higher-profile closures, trucking marketplace startup Convoy collapsed late last year after reaching a $3.8 billion valuation just a year-and-a-half earlier.
Many other so-called unicorns have crumbled after raising gobs of capital in recent years.
“To me, profitability (or a clear path to it) is more appealing than unicorn status,” said Kevala’s Owens. “How many unicorns minted over the past few years will survive? Certainly not all of them. And maybe for the first time ever, more will fail than will succeed. I hope I’m wrong, but time will tell.”
For startups that can weather the storm, it can be beneficial to build a business with a focus on frugality.
Sunny Gupta, who co-founded Apptio in 2007, said the Seattle-area technology business management company wouldn’t have had as much success — it went public in 2016 and sold for $2 billion in 2019 — if it didn’t launch during the 2008 financial crisis.
“It really allowed us to hone down on the value proposition,” Gupta said at a TiE Seattle earlier this month. “ROI was very important. People weren’t really spending money. It’s not that different than what’s happening in the market today.”
Former Microsoft leader Jensen Harris helped launch Seattle startup Textio in 2014. Harris, who recently took over as CEO, said flexibility and adaptability is important to get through challenging macro environments.
Textio initially built AI software for recruiting use cases, but is now focused on a broader set of HR functions.
“We’ve persevered through these cycles by focusing on building products that solve real problems and being willing to evolve as needs change,” he said.
Ambika Singh, CEO and co-founder of Armoire, launched the Seattle-based clothing rental business eight years ago. She’s navigated the company through periods of both growth and also setbacks.
The pandemic in particular hurt Armoire, but its business has rebounded in recent years. Armoire earlier this year opened a new 30,000 square-foot warehouse just south of downtown Seattle.
Singh said one big shift over the years as it relates to growth is making more calculated bets. The willingness to “live outside of our bank account has shrunk,” she said.
“You’re going to move into the big warehouse when you can afford the big warehouse,” Singh said. “That’s different than the way we thought about it in the past.”
https://ift.tt/po9wcQa June 24, 2024 at 04:12PM GeekWire
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