What a Market Downturn Means for Startups

"I'm hearing all of this news about how the startup market is starting to implode and as a Founder I should be freaking out. What's happening right now and how should I be responding?"

May 25th, 2022   |    By: Wil Schroter

About once a decade, the U.S. Financial Markets implode. It happened during the "Dot Com Bust" of 2001, again in the financial meltdown of 2007, and is now upon us in a Post-COVID recovery.

For Founders, while we understand the broader implications of "this is bad" we may not be aware of how it affects us personally now that we're running a startup in this environment. Fortunately, we have plenty of history to fall back.

What Just Happened?

In short, many of the tech IPOs that are the holy grail of startup investments have failed in an epic proportion. The reason that matters is that for startups, all of our fundraising is tied to the idea that someday there will be a massive pot of gold at the end of this journey.

Well, that pot of gold turned out to be empty.

That means all of the major investors along the chain got royally hosed. The public market investors lost money, the massive funds (SoftBank, Tiger Global) who funded those major players lost money, and by proxy, many of the VCs and Angel investors who fueled that dream lost money. When we take the incentives away from people who gamble, they lose interest in gambling.

How Does That Affect Me?

The implications are different depending on how our startups are funded. If we're 100% reliant on investors, the market for raising capital is about to get super tight. As one might imagine, the last thing on an angel investor's mind as they are watching their personal net worth implode is "Where can I go put my money into some super high risk deals that just cost me a fortune?"

If we're reliant on revenue, which isn't a bad thing, we still may be concerned about both consumer and B2B spending as confidence is dialed back in tough economies. When everything is going up and to the right, people are willing to make big bets on our scrappy startup. When things start to tank, it becomes geometrically harder to wring those dollars out of buyer's hands.

What do We do About it?

In times like this, the first thing to do is to "circle the wagons." That means shredding expenses and playing defense to optimize for longevity overgrowth. It's going to get much harder to raise capital and more expensive to acquire customers (because they are spending less).

Right now it's all about extending our runway, and often that means cutting costs, which is why we're going to see a whole lot more stories about layoffs from companies big and small. The Great Resignation is going to turn into the "Great Just Kidding can I Please Have my Job Back.”

The problem is that pulling back is painful. We'd rather keep our staff and hope for the future. We don't want to signal that we're not growing anymore. We don't want to lose our momentum. But it doesn't really matter how we feel about it, because the market is going to force our hand either way. The only difference is how proactive we were when the signals were obvious.

In Case You Missed It

The Benefits of a Hard Reset (podcast) Let's talk about the benefits of a hard reset for a Startup, letting go of liabilities in exchange for a fresh start, and identifying priorities when going through it all.

I’m Burnt Out. What Do I Do? When we hit a point of burn out it's important that we understand what to do about it. If we ignore it, the problem only gets much worse. So let's take a look at what Founders do to deal with burnout head-on.

What if We Fired Everyone and Started Over? As your business grows, everything changes. All things evolve, and skills must upgrade. This includes everyone in the entire organization.


About the Author

Wil Schroter

Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes BizplanClarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.

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