Over the past few months, the startup community has been particularly hard hit by economic uncertainty. Following unprecedented losses, SoftBank has signaled it will downsize and exit stakes in some of its most notable investments. Major venture capital firms like Sequoia Capital and Y Combinator have issued stark warnings to founders telling them to prepare for a severe market downturn. These rare public statements are a harbinger of trouble: as venture capital funding dries up, many startups will not survive.
I’ve founded and led four startups to successful exits in my career, and I’ve seen how quickly market downturns can reshape the startup landscape. We know the pain that existing startups will go through over the next few months, but what about founders who are just starting a new venture? Is there hope for venture capital funding, or should they instead try to do it themselves and start the business?
Founders today are in a better position to start their businesses than those of us who started businesses 20 years ago. There are no longer large capital requirements to purchase premises or equipment, as it is much more feasible to build a business on nights and weekends while renting computers from AWS or Azure for pennies.
Building a business the old-fashioned way – where you don’t spend a dollar until you have a dollar in revenue – may be a foreign concept to today’s founders, but it’s more viable than ever as we we are entering a period of economic turbulence.
The most common mistake founders make during a down economy is not quickly accepting the reality of the situation. Indeed, the environment itself can be deceptive: VCs will still take meetings and provide (often positive) feedback to startup founders, giving founders the impression that they are on the right track.
However, these conversations belie the fact that these same VCs won’t be writing a check anytime soon. The founder’s experience does not change drastically on a daily basis, but the chances of raising funds have dropped to zero.
The best thing a founder can do right now is find a trusted advisor who has seen startups weather previous economic downturns. When industry leaders talk about economic changes and their impact on fundraising, take them seriously. The sooner an entrepreneur factors real economic conditions into their plans and operations, the more likely they are to pull through when things pick up.
Advantages and disadvantages of the bootstrap
Of the four startups I co-founded, two were backed by venture capital funds while the other two were launched without outside investment.
It’s worth noting the potential reward of a successful startup: when you successfully exit, that money goes directly to those who built the business. However, the road to a successful exit is sometimes longer and often more difficult.
When a startup is funded by a company like Sequoia or Y Combinator, startups essentially get a stamp of approval that will lead to other opportunities down the road, whether it’s additional funding, partnerships, clients or even a key hire who can make a significant contribution. contribution.
A seeded startup is not wired to this system and instead must use compelling metrics to put itself on the map. Seeded companies that can show data proving growth, traction, and velocity will find a falling market represents an incredible opportunity. If you can outlast your competitors and get through the toughest conditions, then you can find new investments with extremely attractive rates and terms when the market recovers.
Survive a declining economy
The overnight shift in the startup economy has likely given founders and entrepreneurs a boost today. As recently as January of this year, The New York Times was reporting on the remarkably frothy tech finance market.
Now, a few months later, the party is over. Today’s startup founders, bootstrapped or not, need to remember to put their business in context.
I can think of very few companies that had an idea, built it, and then found immediate success. Instead, the story of the most successful startups involves ideation after ideation until finally the company lands on the formula for success.
The only way to succeed is to refuse to give up and be intentional about how you deploy your precious capital to maximize your chances of success.
Peter Pezaris is the SVP of Strategy and Experience at New Relic.
The opinions expressed in Fortune.com comments are solely the opinions of their authors and do not reflect the opinions and beliefs of Fortune.
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