May 26, 2022

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Friend! Welcome to the weekend. I hope you rest and gain strength. We have a pretty casual job today, so pour yourself another coffee and get started.

startup growth paradox

This week, the exchange spent a lot of time highlighting the changes in the startup market. In short, investors are re-evaluating the value of tech companies, and it appears that some of the speculative enthusiasm fueling startup performance in 2020 and 2021 has faded.

For many companies, short-term market changes are not a problem. Few startups have enough money to operate and can handle declining revenue multiples while growing steadily. Call it the Databricks strategy.

But for some startups, the situation looks different. Here’s where some startups are today:

  • With market-level speculative capital, they raised a historically large round in 2020/2021 at a higher price.
  • They spent a lot of money on recruitment and development goals, resulting in a high burn rate by the end of 2021.

is not some kind It’s a bad situation if the startups we’re talking about have enough money to reach them by 2022. Until then, tech company valuations may be somewhat good. But with companies growing faster than last year – sometimes three times a year! Some startups have stuck to growth goals that are inherently costly. This means that many of the increases from 2020 and 2021 won’t help businesses all year long.

This means they have to pick up again, the timing is bad.

That’s why some tech startups are now looking at the following two options: grow slower, save money, or step on the gas pedal at the expense of cash. which is difficult Not The option might be useful. how so?

  • Startups that have hiked prices high in hopes of rapid growth and are now facing a potential next round of valuations that fall short of their expectations may limit growth to save money. This will provide a long runway for their next funding round. However, this would hurt their growth rates, undervalue their stocks, limit fundraising opportunities, and cast doubt on their long-term viability.
  • Startups that were expecting rapid growth at high prices and are now facing a potential next valuation that falls short of their expectations may continue to grow, limiting their cash balances. This will shorten their money runway but keep their growth rates relatively high. However, since investors point out that profitability matters, spending just on growth can be a Faustian deal.

This is the startup growth paradox. This is solved by going back in time and raising capital at lower prices or perhaps with a more limited development plan. But since last year was a record year for a fundraising startup in terms of volume and price, it’s a little late for that.

How startups handle this challenge will be a big topic in 2022.

There are correction factors. Investors could fund their existing portfolio companies with fixed-price renewal rounds. This will be vulnerable to startups, but far from fatal. And startups can take advantage of some less costly growth methods — product-centric development, etc. — in the hope of driving decent revenue growth without losing business.

But following these forms of growth is not easy, even for companies built with these go-to-market practices from day one. How to switch from other sales methods is unclear for startups that suddenly want to find a way to generate new sales without hiring more sales staff or spending more on advertising.

Sorry for all the bad news lately, but consider this the tonic at last year’s party. It’s a hangover.

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