Even bleaker times are coming for tech startups, in Europe in particular, thinks Insight Partners’ managing director Deven Parekh. 

“We think that over the next 12 to 24 months Europe is probably going to feel headwinds that will be almost worse than any other area in the world,” he tells Sifted.

“I think we’ll have a rough 2023 and my hope is that we’d be coming out of this in 2024.” 

The New York-based investor, who’s led deals into the likes of Calm, Fanatics, Vinted and Europe’s most paper-valuable startup, Checkout.com, says Russia’s war on Ukraine and the connected energy crisis make the situation even more acute in Europe. 

That means he’s been spending a lot of time working with founders and CEOs on how to deal with a trickier outlook than many have ever faced before. 

Here, he shares some of the advice he’s been giving them with Sifted.

Where the pain will be felt

Some sectors will be more brutally affected than others, he emphasises — so all advice needs to be tailored to an individual company. Any company in an “interest rate-sensitive vertical” will be hit hard — and should take “dramatic action on costs”. 

On the flip side, sectors like cybersecurity “haven’t seen much impact at all — they’re even seeing strong demand”. Well-capitalised companies in an area like that should keep going, he adds: “Don’t pull back; this might even be a good time to pick up market share.” 

Advice for founders

First up: get to a place where you have two years’ runway or more. “We don’t know how long this is going to last,” says Parekh. 

Secondly, make layoffs just once. “Don’t do death by a thousand cuts; don’t do too little and then have to make layoffs again in three months,” Parekh says (several European unicorns have already had to take this approach — Kry and Klarna have both announced several rounds of layoffs).  

“Where it used to be a very negative sign for a company to do a layoff, I don’t think it’s perceived as negatively [today]”

And think hard about how you announce any redundancies. “Personalise the communication to the extent that you can,” he adds. “Treat people well, communicate why you’re doing this and explain to people what the implications are. Say, ‘Hey, we only had 12 months’ runway, but now we’ll have 24 months’ runway.’ And deliver the news as empathetically as you can.” 

He says that many companies overhired in 2021 when they could raise capital cheaply, but “situations like that we now find ourselves in force companies to actually align their cost structure to what the real market opportunity is, and force them to make rational business decisions.” 

With huge companies like Amazon, Meta, Twitter and Alphabet having all announced big layoffs in recent months — along with hundreds of smaller startups — Parekh thinks this kind of news strikes a slightly different tone from in the past. “Where it used to be a very negative sign for a company to do a layoff, I don’t think it’s perceived as negatively [today]. It’s the responsible thing to do.” 

Cost of living crisis

While layoffs are happening around the world, European startups also have to contend with the iinterlinked cost of living and energy crises. 

The CEO of one company Parekh sits on the board of in Europe called him up recently to talk about whether to give a special energy bonus to employees, while also trying to cut costs across the board. “He walked me through the average energy bill for an employee a year ago, versus today. His view was, this is an action we need to take — we need to make sure the people who stay at the company [after any layoffs] aren’t worrying about their energy bills.” Parekh says he came round to the CEO’s point of view.

“Inflationary pressure causes you to cut more people… but you want to make sure the people you have have the income they need to pay the bills,” he says. 

Be wary of debt

2022 is looking like it’ll be a record year for debt financing in Europe. But Parekh isn’t sure raising debt or unpriced rounds is such a wise move. “I’m not a big believer it’s generally a good idea — there’s a discipline about raising capital at a price that forces you to confront reality.

“It’s way better to say, ‘there’s a new level set, this is where we are, let’s figure out where we build from here’”

“Knowing exactly what you make and spend, and what your company is worth is an important thing.

“My advice? Just do a priced round. It’s way better to say, ‘there’s a new level set, this is where we are, let’s figure out where we build from here’. I tell founders it’s painful for me too.” 

Insight in Europe

In 2022 so far, Insight has invested in 20 European startups, making it one of the most active US-HQd VCs in Europe. Investments include Wandelbots, Builder.ai and Leapsome. 

Still, that’s a significantly slower pace of investment than 2021, when it backed 27 European companies. 

As of June this year, Insight had invested $6bn into around 100 companies in Europe. It’s been making investments into European startups ever since its first fund of $24.1m, which launched in 1995; it’s now on its 12th, of more than $20bn. 

The firm now has a team of three investors — Andrew Starker, Ale Luciano and Eugenia Lustgarten — based in its 25-person strong London office, which first opened in 2016.

Amy Lewin is Sifted’s editor and cohost of The Sifted Podcast, and writes Up Round, a weekly newsletter on VC. She tweets from @amyrlewin