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What to do in a downturn — at every stage

Startups can still fundraise and scale, but slow and steady will win the race

By Sifted

Investments and valuations are down across the tech industry right now.

“We’ve got disrupted supply chains, we’ve got labour shortages, geopolitical tensions, there’s a lot of uncertainty out there,” says Glen Waters, head of early stage practice at Silicon Valley Bank. “One thing that investors really, really hate is uncertainty, that’s leading to a compression of valuations and also fewer deals, particularly mega deals.”

But that doesn’t mean startups can’t fundraise and scale. From January to June 2022, VCs in Europe raised almost €12bn in fresh capital. Around €2bn of that was raised by new funds. 

So what should your startup do in a downturn? And how does this differ according to your growth stage?

Larger companies are the first to feel it 

According to Emma Phillips, investment partner at LocalGlobe, we’re starting to see how the public market is hitting VCs.

“The world has shifted significantly in many ways and it’s just had a massive impact on initially the public market,” she says. “But that’s feeding into the private market now.” 

The first end of the market to feel it are the larger companies, the ones closer to exit, so they’re looking for either a listing or a sale or an acquisition of some sort”

Reem Wyndham, founding partner at Pact VC, says this is first impacting bigger scaleups — a recent example being Klarna’s dramatic valuation slash and downround — but is already moving down the food chain. 

“The first end of the market to feel it are the larger companies, the ones closer to exit, so they’re looking for either a listing or a sale or an acquisition of some sort,” she tells Sifted. “The question is how and when will that reverberate down to the earlier end of the VC pipeline.” 

Wyndham adds that a flat — or even a down — round can still be healthy; we don’t know how long these market conditions will last, so it’s better for scaleups to raise at a reasonable valuation than not at all. 

“A lot of founders have struggled with raising a flat or a down round when they’ve been hitting their targets,” she says. “But once you’re realistic about your valuation, take the money that’s on the table.” 

If you’re growing, think about unit economics

For Waters, one of the most important things for startups at any stage to note is the paradigm shift from venture focusing on growth to investors focusing on value and profitability. He says good companies will still get funding, but startups should be prepared to show good unit economics — where profitability is measured by a per unit (ie per customer) basis. 

That doesn’t mean the company has to be profitable,” says Wyndham. “But are they working towards, at a unit level, sound economics that can grow and scale and eventually reach profitability?” 

A startup’s runway — how long your company can operate before running out of money — is also increasingly important, says Waters. 

“For example if it’s a one-year runway growing at 3x growth vs two years of runway with 2x growth, I’d be extending runway,” he says. “Because I think runway trumps growth at the moment.” 

Máté Kun, cofounder of foodtech startup Growth Kitchen, has tried to incorporate these principles by being relatively conservative with its growth strategy and spending. 

“We are in a great position to continue with our controlled growth strategy, focusing on expanding into fewer areas and really concentrating on getting them right,” he says. “Now, more than ever, we are focusing on delivering sustained value and deploying capital efficiently.” 

At any stage, get the right type of investor 

To raise or not to raise, that is the question. Waters says if you’re offered money, take it (especially to extend your runway) — unless it’s from the wrong type of investor. 

“When we think about the right type of investor, what I would suggest to a founder now is think about both the investor that is adding value in the short term, as well as the long term, so who’s going to help you think about managing this downturn,” says Wyndham.

“Have your pitch deck, have your financial model, have your cap table, have everything ready to show that you’re a grown up business and a quality business”

Phillips says the best time to raise is when you don’t have to raise and the worst time to raise is when you’re distressed, so it’s better to get a head start. She adds startups should take advantage of longer timelines. 

“We have more time to spend with founders during fundraising processes now,” she says. “Last year, from meeting a founder to making a decision, it was happening in a couple of weeks, which to really get to know founders and get to know teams and for them to know us and do proper market due diligence, you need more time than that.” 

If you are raising, Waters says preparation is always key: “Have your pitch deck, have your financial model, have your cap table, have everything ready to show that you’re a grown up business and a quality business.” 

And Phillips adds VC money isn’t the only cash available. 

“There’s venture debt, there are other non-dilutive solutions, there’s grants, there’s R&D credits,” she says. “Ensure that you’re aware of what other financing options are available to you and explore them by bringing in a finance leader.” 

If you’re seed stage, focus on product-market fit 

For Wyndham this is a great time for early-stage companies, especially at the seed and late-seed stage, to “go lean” and focus on the core that’s actually driving profitability — product-market fit. 

“Investors will be happy to see a nimble responsive team that have understood the shift in the market and having the founders refocus on controlled product-market fit testing, as well as controlled testing of growth,” she says. “Cut down as much as you can without jeopardising what you’re delivering. If you’re jeopardising that then you are going to come out the other end if this subscale.” 

Phillips adds that slow and steady can win the race when it comes to raising in a downturn. 

Investors will be happy to see a nimble responsive team that have understood the shift in the market and having the founders refocus on controlled product market fit testing” 

Don’t market your products until you’ve tested and built a product customers want to use and you’ve validated the go-to-market channels and the marketing channels,” she says.

Once you get past product-market fit and your first rounds, it’s all about scalability, says Waters. 

“As you’re going through Series B and beyond, you really want to be building out full functions which are scalable and specialised,” he says. 

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