A Perspective from Bob’s Desk.
Executive Director, SWAN Impact Network

Likely you have seen headlines, such as the Wired article, “The Bad Times are coming for Startups”. The article starts with these words, “Last week, the employees of Cameo, a startup that sells personalized videos from celebrities, gathered for an all-hands meeting. The news was not good: Nearly a quarter of the staff was being laid off.” And the article goes on to say, “Soaring valuations and booming IPOs made startups seem like a safe bet, inspiring hundreds of new venture funds. Now, the party seems to be over.”

Concerns about the economy (inflation, possible recession, delayed IPOs) are causing VC to give their portfolio companies tough-love advice. “Cut spending. Conserve cash.” These words are a complete turn-around from the Silicon Valley message to companies: “Grow as quickly as possible to create or disrupt a market. Gain market share by raising and spending as much as possible and don’t worry about getting profitable.”
This shift in mindset influences how we, who are most often the first investors in pre-seed companies, should think about investing.

How should early-stage startups think about all of this?
Starting a company during a time of economic uncertainty has a number of advantages. Fewer startups are created, so competition in your niche market may lesson. Hiring becomes less difficult when other companies have layoffs or hiring freezes. Service providers need to shore up revenue, and may be more accessible. And most importantly, when the economic outlook improves, which it always does, the VCs will have fewer companies at your stage of development to invest in, since your class of startups will be smaller.

How should early-stage angel investors think about all of this?
Since we think of a five-to-seven year window for return, companies starting today should exit in a much stronger economic environment. We should continue our search for promising companies. And we should place a greater emphasis on cash-efficient companies. And, we should require first closing investment amounts to be sufficient to carry the company for two years. Can the company make solid business progress in two years with limited funds? And we will need to work diligently at syndication to help the companies to get to the first close amount.