Back in 2015, the Federal Reserve had started a significant reduction in the amount of fiscal stimulus it was providing to the US economy. In 2015 the tech sector, and venture investments were at all time highs and many experts were suggesting we were in a bubble.
The correlation between this stimulus, the public technology sector (as represented by the NASDAQ stock index), and venture investment is quite strong. Logic suggested at that time, that private, venture-backed, and bootstrapped companies may have to ‘buckle down’ and prepare for winter, a period of difficult business conditions and hard-to-obtain financing from either venture or traditional sources like bank credit lines.
If you thought 2015 was frothy, the tech sector became seriously overheated into 2019. The pandemic of 2020 and the fiscal stimulus that came with it seemed to delay any problems in the tech sector.
Now it’s 2022, and while this article is a little late to be updated from my 2015 post, inflation has been on the rise. The Federal Reserve has announced its intentions to reduce its balance sheet, and raise rates, and the NASDAQ 100 index is down around 20% from its all-time highs.
Regardless, many start-ups may have not yet felt any pain or yet gone to seek additional capital in what may be difficult times.
Here are my Six (updated) steps to surviving a startup tech bubble.
- Get Profitable
- Cash (and Credit) are King
- Redefine Success
- Calibrate Expectations to the Market
- Team Alignment More Important Than Ever
- Know Thy Customer
When the economy suffers, and investor risk tightens, so do the GPs who invest in these funds. Your investors will either have difficulty raising new money or may raise their investment criteria.
Sure, your investors said ‘grow-big, fast’. You ran at a loss to gain share and customers and grow top-line metrics. That was low-risk when your investors stroked big checks to you to back your growth and you had leverage.
There’s no better way to not worry about investor follow-on investments than to buckle down, fine a way to break-even or better, and ensure your company can survive to fight another day.
Cash (and credit) are King
In inflationary circumstances, that is even more important as manufacturing and other companies that hold inventory have incentives to pre-purchase commodities and components to ensure supply chain stability and capture lower costs in a rising cost environment.
Manufacturing companies are especially dependent on sources of credit to float their operations and inventory. In a declining economic environment, banks are likely to increase their lending standards, raise rates and be very stingy. Make sure you have all the credit you need BEFORE the economy turns and banks turn off the credit spigot.
This is related to becoming profitable, but the economic climate has changed. “Grow big fast” may no longer be an appropriate strategy. The IPO window may be closed for the foreseeable future and acquisition at a desirable valuation may not be in the cards.
This can impact company morale at all levels, including within the leadership team.