How should Founders prepare for a Decline in Startup Valuations and Investor Interest?

How should Founders prepare for a Decline in Startup Valuations and Investor Interest?

The startup world held its breath as the World Health Organization proclaimed the COVID-19 outbreak a worldwide health emergency at the end of January 2020. Many entrepreneurs braced for a drop in funding, postponing hiring and growth plans as they looked for new ways to operate in a world transformed by the pandemic. 

TechCrunch and other tech sites published stories and interviews with investors who quit Silicon Valley in a ruckus, screening potential investments remotely while they set up shop in Austin, Miami, and other locations to watch how the scenario unfolded.

The epidemic, however, had little effect on investors’ appetites: new records for VC funding, unicorn creation, and, in certain cases, significantly less interest in due diligence than in previous years were set last year. Money is still available for founders with strong storytelling abilities and timely concepts, but investors now have higher revenue and growth expectations, which may limit the kind of firms that receive funding.

The topic of discussion this week is how founders can prepare for a possible drop in startup valuations and investor interest. Natasha Mascarenhas, Mary Ann Azevedo, and Alex Wilhelm, the hosts of the Equity podcast, discuss their forecasts regarding startup funding and due diligence in 2022 in this column:

‘The Lean Startup’ has aged with an asterisk, according to Natasha Mascarenhas. When I originally explored this subject, I immediately thought of the obvious: private businesses will refocus on their runway because of the public market slowdown, anticipating a similar reduction in venture investment. However, as we have stated, there is no scarcity of venture capital in today’s markets. Because all of those mega-fund funds have to go somewhere, I expect that early- and mid-stage companies will be able to benefit from a capital-rich environment for a little longer than late-stage companies creating a bubble within a larger burst will.

Is it unrealistic to expect startups to construct leaner, less extravagant operations in a growth-focused environment where so many companies have high valuations and plenty of cash? In response to a downturn, I believe we will see a resurgence of lean startups that know how to stretch a dollar until it squeals. To put things in perspective, Eric Ries’ “The Lean Startup” written in response to the 2008 financial crisis and promoted the idea of simultaneously testing, building, and managing a startup, prioritizing minimum viable products over a perfectly buttoned-up platform to create faster, nimbler organizations.