As the year 2023 commenced, it became evident that challenging times lay ahead for individuals and businesses alike. The scarcity of money in circulation made it increasingly difficult to sell products or secure funding. Investors and companies had tightened their belts, and the overall business landscape had shifted significantly. While these circumstances may not seem favorable at first glance, it is worth exploring the surprising opportunities that arise during downturns, particularly for startups.
During recent waves of tech layoffs, Crunchbase observed an interesting phenomenon: displaced workers were choosing to transition into entrepreneurship and start their own companies rather than returning to unstable and unfulfilling jobs. This trend suggests that individuals are recognizing the potential for personal and professional growth during difficult times.
Accelerator programs such as Y Combinator, have also noticed a significant increase in the quantity and quality of applicants since 2022. This surge can likely be attributed to the resilience and determination of entrepreneurs who know, extra support when trying to launch a business is imperative, especially in this current market. The scarcity of money and the need for creative innovation have driven individuals to think outside the box, leading to a surge in entrepreneurial spirit.
One cannot ignore the success stories of Airbnb and Stripe, two of the most prominent startups today. Both companies were born during the last recession in 2009, proving that downturns can serve as breeding grounds for innovation and long-lasting design. These startups demonstrated their adaptability by creating products and services that catered to the cost-sensitive environment and economic requirements of their time. They are proof that recessions can be a breeding ground for innovation and long-lasting design!
Look at how the AI sector has experienced exponential growth in the post-pandemic world. This industry has shattered the rhetoric of a downturn in 2023 with its groundbreaking valuations. While not every sector is suffering, astute founders can identify industries poised for capitalization.
Investors have also recognized this potential and are prioritizing seed-stage investments in higher-quality companies, particularly in the generative AI field. In the first quarter of 2023, the average deal size for seed companies increased to $3 million, up from $2.6 million the previous year. Additionally, the pre-valuation for seed-stage startups also surged, reaching $13 million in Q1, compared to $10.5 million in the previous year. These figures highlight that despite what feels like a negative Q1, investment is available for startups that demonstrate innovation, resilience, and the potential for unshakeable success.
The capital is out there but investors are more risk-averse and more thorough when it comes to due diligence, so if you are heading your startup’s finance department and have an ambitious founder wanting to capitalize on this down-turn, PREPARE EARLY! Future you that is prepping for due diligence meetings will be super grateful that you prepared your data infrastructure, cash flow, balance sheets and invoices ready for when investors request them.
More importantly, make sure the numbers being sold to investors match the story being told. When the Finance department connects with the CEO to work on the Pitch Deck, ensure that the data provided by finance aligns with the picture investors will be painted. Because if later down the line things aren’t following the path investors were told they would follow, or correct data comes out in a later round of due diligence, you’ll have a lot of issues.
When times are tough, customers become more cost-conscious and investors become more thorough and risk-averse, but that doesn’t mean there aren’t opportunities out there for innovative entrepreneurs in this changing landscape. By navigating the financial landscape wisely and offering products or services that people genuinely want and value, startups can emerge stronger and more resilient in the long run. Entrepreneurs need to stay nimble and communicative with their finance department, to ensure their business is organized, aligned, and can adapt to the evolving market demands. These challenging times can serve as catalysts for creativity, resourcefulness, and the birth of groundbreaking ideas.
As an expert in partnering with early-stage tech start-ups, feel free to get in touch if you require advice on fractional, full-time or interim finance leaders in NYC or UK.
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Photo by Faris Mohammed on Unsplash
