Market situation and VC-funding environment: how should start-ups react?

The high uncertainty characterising the current market situation and VC-funding environment is endangering and affecting many businesses. Indeed, it is now becoming increasingly difficult for startups to survive, not to mention to thrive, in the current economy. The worst part is that this seems to be only the beginning of a larger recession coming our way in Germany and globally.

Current Market Situation

According to the World Bank‘s latest Global Economic Prospect report the conflict in Ukraine has magnified the slowdown in the global economy, which is now facing what could become a long and protracted period of low growth and elevated inflation. Many factors are suggesting that a severe downturn is in full swing, coupled with still very high inflation at about 8-9% both in Europe and the US. With the solutions to the supply shock caused by ongoing Covid restrictions and the Ukraine war not in sight at the moment, central banks have to work on the demand side to bring back price stability. This means that after years of interest rates at or below zero, we are now in an environment where rates are rising. As Jerome Powell suggested recently in Jackson Hole, rates will continue to rise for some time. This in turn is leading to lower equity prices and an economic slowdown. In the US, the markets have realised this already quite a few months ago, with JP Morgan Chase & Co. CEO, Jamie Dimon infamously saying: “A hurricane is right out there down the road coming our way.” However, in Europe and Germany in particular, many are only now truly waking up to this reality.

VC-funding environment

Naturally, the market situation and VC-funding environment has been affected by this with valuations falling across all stages and industries. Indeed, according to a new “State of Venture” report by CrunchBase Insights, during Q2 2022 only about $120 billion in global venture capital funding were raised across 7651 deals, representing the largest quarterly percentage decline in deals, and the second-highest decline in funding in a decade. Various down rounds are also clearly suggesting that the era of free money and overvaluations which peaked in 2021 is coming to an end. The most dramatic example here is Swedish payment provider Klarna, reportedly raising at a $6.5 billion valuation, only about 1/7 of the $45.6 billion valuation of June 2021. 

Investors and venture capitalists are scared as uncertainty is massive and no one knows how long the downturn will take, nor how the market situation and VC-funding environment will develop. Increasingly in the past quarter, well-established venture capital funds have cautioned startups to adjust to a new and very different funding environment, warning founders to prepare for a longer recovery period and difficult access to capital. 

• “We do not believe that this is going to be another steep correction followed by an equally swift V-shaped recovery like we saw at the outset of the pandemic.” – Sequoia
• “After a decade of free money, quantitative easing, zero interest-rate policy, and an unprecedented bull market, the best party in town has come to an end.” – Social Capital

This uncertain and worrying market environment has caused many startups to initiate massive layoffs, which already reached peak COVID times levels in April. For instance, Hipcamp laid of 60% of employees in April, Gorillas cut half of its corporate staff, meaning around 300 employees around the world, and recently in August Tier cut 16% of its workforce.

Finally, overall market sentiment is deteriorating as shown by McKinsey’s survey. Respondents’ takes on both current and future conditions in the global economy have grown progressively gloomier since June 2021, with half of all respondents expecting conditions to worsen in the second half of 2022.

Strong Headwinds can also be a great opportunity

Nevertheless, historically economic downturns have often bred unicorns, as many of the largest companies today came from previous recessions. Uber, for example, launched in 2009, initially focused on providing a niche for “executives” that wanted a more comfortable and uninterrupted ride, and IPOed at a $75.5 billion valuation in 2019. Also founded during the economic crisis of 2008, AirBnB has revolutionised the travel lodging industry, and recently raised another $1 billion in funding from Silver Lake and Sixth Street Partners in April 2020. So, despite the current market situation and VC-funding environment, we will also see winners of this downturn.

History has taught us that these winners separate themselves by four core success factors:

Quick Decision Making

In these market conditions informed and well thought reactive decisions will make the difference, as planning ahead and being ready to evaluate and move quickly are crucial for the business survival.

Clear Communication

Leaders should deliver essential information in a quick, clear, and transparent way, while communicating broadly to everyone in the team, especially when bearing bad news to ensure that no one feels left out.

Strict Cost Control

It is now more than ever crucial to apply measures to quickly implement spend control as having a clear view of your expenses to strategically cut costs and discipline your spending can mean the difference between life and death for your company.

Accurate Planning

When economic downturns happen, a well-thought-out budget is one crucial tool to guarantee survival. Indeed, a budget, when properly implemented, may support you in assessing new prospects, hires, pivots, and other eventualities while also guaranteeing financial discipline. 

But how can founders master these four behaviours?

The four behaviours previously listed are essential for every founder guiding a business through a recession, but simply having these skills or instincts is often not enough. For example, quick decision making is often useless or dangerous if it isn’t paired with deep knowledge of data and business KPI trends. It is crucial for founders to have a constant and clear overview over financial and non financial data allowing them to make quick data driven decisions about their business.

Having a financial tool like Pectus which enables this kind of data vision in a single source of truth is essential, as the challenges of the current market will require founders to make hard and quick decisions for their businesses. Founders and Finance teams in times like this need to have a clear overview of all expenditures in order to control business spending, as well as a platform enabling them to implement quick forecasts and reforcasts, easy to share and comment on with all managers and decision makers.  With the economic downturn, using a tool like Pectus can offer full transparency on spending, providing easy filters to use and drill downs to understand performance deviations, help you improve your planning accuracy, making forecasting and reforecasting easier and quicker.