A Letter to Startup CEOs — The Year Ahead (2023)
“There is a crack in everything. That’s how the light gets in” — Leonard Cohen, Singer & Poet
In our high tech startup world, 2022 has been a tough year internally, and 2023 will be a tough year externally.
🤷🏼♂️ What do we mean?
2022 was tough for startups. Suddenly money became hard to source and reality set in that the typical 18–24 month run before raising another round was not going to work. As a responsible CEO, you should have made deep cuts in overheads, reconfigured for much slower growth (if at all), and prepared to run a lean and efficient business with cash resources to last through 2023.
If you did not do all these things, then it’s probably too late — you will need to make some tough calls now and through the next year and unfortunately you are going to constantly find yourself on the back foot.
You don’t live in the “Startupverse”. Everything external affects your company. The macroeconomic climate globally affects business directly and this next year we will be in a difficult recession. The largest companies (Fortune 500 and non-tech) are cutting back and reconfiguring budgets for lower spend — this is the bulk of the global economy. Projects are being put on hold and nice-to-have solutions shelved; this affects your revenue line directly.
Layoffs affect your per-seat license-based revenue or usage-based revenue. You may sell to the IT organization and think you are shielded. Well, no difference here either, as they have less staff, so no new projects and staff being made redundant means that some systems are retired. You may sell to consumers — their real wages adjusted for inflation are reduced, and a portion of them (probably more so your target market) are out of jobs.
You can do more with less. Our research has clearly shown that startups are over staffed. Productivity has been a major challenge for at least 4 years fueled by cheap money and misconceived ideas of ‘growth at all costs’. We have seen 2, sometimes 3 people doing the same amount of work as 1 person did before. This needs to revert back to where we once were, as growth at all costs is by its very definition, uneconomic.
❓So where to from here?
💵 Build a plan that allows your cash to last at least 18–24 months from 1-Jan-2023. Your largest expense is labor. So figure out what’s actually necessary. Tough decisions need to be made, but you’ll be surprised at how, if handled right, your team will step up. Keep only critical and exceptional who are dedicated.
📈 Expect net growth to be 20%-30% from the prior year accounting for churn, downgrades etc. (If you just started selling then you really should be aiming for much higher).
📊 We’ve written before about some KPI’s (here) which should, in conjunction with the above, help you navigate the metrics VCs are looking for.
🎯 Focus on key markets. Focus on retaining your customers. New products and features, new territories, etc. that don’t have a clear ROI (i.e. contracts already signed for them) should be parked.
🤝 Always Be Closing (ABC). Founders are their companies’ best salespeople and also the first to stop selling, handing it over to others — go out and get the revenues.
🍕 Cut the waste. Pizza and beer are just fine once a month. Cold brew on tap, free breakfast, massages, fancy offices, and monthly parties are unnecessary. Rather, believe in the purity of the work.
🏦 If you have venture debt, start working out what the options are. There have already been cases of lenders calling in venture loans upon seeing the remaining cash on your balance sheet.
🦁 Understand where you are in the funding food chain. Series A is now at $30-$50m valuations, Series B is at $80-$120m, and Series C onwards have come off by 70%+. VCs have less money than they let on (once you take management fees and reserves into account and an expectation that many won’t have a next fund). If you get an offer and need cash — take it! Down rounds are just a vanity hit, being in business is reality.
2023 will be tough. We don’t expect green shoots until after the summer at the earliest, and probably even longer should certain macroeconomic and global risks persist. But also remember that bad times visited us all 10 and 20 years ago and even then, great companies emerged. Fundamentally good companies buttoned down the hatches then, and most got through.
What makes great businesses is not an up-round every 18–24 months — rather it’s the ability of its people to work the angles, bob and weave, be frugal, and build for the long term.