By Barton Warner and Luciana Nunez
Six short months ago, Founders faced a litany of questions from investors: How large is the addressable market? How big is lifetime revenue? What is the innovation pipeline? How fast can it scale to achieve 10x returns?
Today, these same conversations sound very different: What are the unit economics? How large are founder salaries? What is the path to profitability?
According to Crunchbase, VC investments fell to $39 Billion in May 2022, down from a peak of $70 Billion in November 2021. As funding tightens, leaders need to proactively pivot to meet new expectations.
This change in investor sentiment can feel like a curve ball. It can even feel depressing. After all, shoring up profits by cutting costs isn’t exactly fun. It is also a sure-fire way to stifle growth. Founders may feel like they lack the capabilities to execute in a fundamentally different ball game. Does it have to be that way?
Our research with startup founders and investors shows how leaders are using this moment to fundamentally rebuild their business strategies, re-engage with stakeholders and employees, and adapt their leadership mindsets:
1. Time for a New Strategy. Startups are nascent organisms. Achieving profitability goals by simply cutting costs is likely to stifle growth, creating a death spiral. We believe leaders need to fundamentally rebuild their “strategic house” based on new investor expectations. They need to see this as an opportunity to look objectively at customer value creation. By critically assessing customer segments and capabilities (costs) required to succeed, leaders can dramatically simplify the near-term mission without slowing growth and innovation.
2. Time for Stakeholder Management. Leaders need to see this as an opportunity to communicate more with investors rather than less. They need to proactively show people how the thinking has changed. They need to be vulnerable and ask for ideas or success stories that can be emulated. Importantly they need to use the startup community as a source for new thinking and adopt a pay it forward mindset.
3. Time to Re-Energize. Leadership muscles will be needed more than ever. So will grit and determination. Successful startups will use this as an opportunity to be honest with themselves and their teams. They need to demonstrate humility and vulnerability as fuel for commitment. Leaders may feel the need to “spin” data to keep teams believing, but the most talented team members will see through that. Instead, leaders need to bring teams into the inner sanctum: Here is where we are, here what investors need to see…even here is how much is in the bank. This not a time for “toxic positivity”, rather a moment for “brutal honesty”. It is a time to re-assess capabilities and adapt the culture to be fit for purpose.
Startups need to look at themselves holistically. They need to do all these things rather than one or two. Yet each piece of the puzzle requires true objectivity and thought partnership. Tapping onto your network of mentors, peers and coaches can help you create the space for reflection.