Startup Life/Analysis/ Three quarters of startups make cutbacks as uncertainty looms, say Sifted readers We asked readers how their startups are reacting to the downturn. Here’s what they told us. By Kai Nicol-Schwarz 22 June 2022 \Startup Life How to use appraisals to retain female talent By Anisah Osman Britton 24 March 2023 Startup Life/Analysis/ Three quarters of startups make cutbacks as uncertainty looms, say Sifted readers We asked readers how their startups are reacting to the downturn. Here’s what they told us. By Kai Nicol-Schwarz 22 June 2022 The majority of startups are making cutbacks in preparation for a tech downturn, but most aren’t pressing the panic button just yet, according to respondents to our recent reader survey about how tech companies are reacting to the market uncertainty. Ninety-four founders and startup operators shared their thoughts and experiences with us, from a range of company sizes, sectors and countries in European tech. The word of the day: caution. 72% said their company has taken steps to increase its runway and 83% think it’s going to get harder to fundraise in the near future. 61% have cut or frozen hiring plans and 52% feel less secure in their jobs. But, just 22% of respondents’ startups have laid staff off so far, and those that are hiring predict a surfeit of top tech talent now becoming available. We also asked about how conversations with investors have changed and what steps startups are taking to make their money go further. Here’s what Sifted readers told us. The hiring landscape for startups during a tech downturn Two thirds of respondents told Sifted their startup has dialled back or completely frozen hiring plans, chiming with recent reports from jobs platform Otta that recruitment at tech companies has dropped 20% in the past three months. As tech stocks crash and VCs become increasingly miserly with their money, a number of readers said they’re only hiring for essential roles as the focus shifts from growth to efficiency. “We no longer negotiate salaries.” According to one founder, round sizes have halved in the last few months, and “this reduced ability to fundraise means we’ve needed to reduce hiring”. Another said their startup no longer negotiates salaries, suggesting the balance of power on the job market is shifting from candidate to employer. Just months ago, in a reader survey about the hiring landscape, founders and startup operators told Sifted they were offering higher salaries and better perks as competition to secure the best tech workers ramped up. “Some of our job offers have been rejected as candidates are afraid to make a move.” But it’s not just employers getting cold feet. The uncertainty on the tech scene is also making some candidates more hesitant to accept roles, and a respondent who works in the talent department at their startup said they’ve had candidates reject job offers because they’re “afraid to make a move”. Startup tech layoffs Other founders and startup operators told Sifted they’re actively looking to cut their payroll in anticipation of the tech downturn. They’re not the only ones — several well-known European tech companies are laying off staff as they look to shore up finances in the face of a looming economic downturn. While Sifted readers reported that layoffs weren’t currently widespread, around a third of them think the startups they work at will lay off staff in response to the uncertainty on the tech scene. Because of this, startup workers are feeling significantly more worried about their job security, and 52% of respondents told Sifted that they feel either a little or a lot less secure in the current climate. We also asked Sifted readers whose startups had laid off staff which departments had been impacted. While the sample size is small, the data still paints an interesting picture of the roles European tech companies are scaling back on. Sales and marketing departments have seen the most layoffs, and a number of respondents told Sifted that these roles are the ones that they’ve stopped hiring for, too. Talent and recruitment teams have also been hit, unsurprisingly — despite being in extreme demand at the end of last year. Talent jobs also saw the largest number of layoffs among staff at Klarna, according to a spreadsheet shared by the company. Do startups have a recruiting opportunity during the tech downturn? But not everyone is cutting back on recruitment or getting rid of staff, and 39% of respondents told Sifted they’re continuing to hire as planned or actually ramping up efforts to hire tech workers. “Economic uncertainty is the best time to take the best talent on the market.” A number said they’re tapping into the pool of talent looking for new jobs, following layoffs at some of Europe’s biggest tech companies. “Now is the time to hire,” said one founder. “Plenty of otherwise hard-to-get talent is becoming available. Economic uncertainty is the best time to take the best talent on the market.” Another agreed, saying they “think there will be enormous opportunities to acquire top talent from competitors who fail”. One respondent told Sifted that because so much talent is entering the market, their startup is actually considering accelerating growth plans. Making money go further 72% of Sifted readers told us that their startup is already taking steps to increase its runway, with the biggest cutbacks coming in hiring and marketing spend. Of those whose startup hadn’t yet made cutbacks, half thought it would in the near future. For many, this means decelerating into the downturn. “We plan to sacrifice some growth in order to be more efficient,” said one founder — but this could have a negative knock-on effect on the business in general, they added. “I expect this means that we won’t hit our sales target numbers — as no marketing spend means fewer leads, which means fewer sales. This will lead to commissions falling, and the best salespeople will leave.” Outside consultants are also being cut by many, as startups look to bring as much functionality in-house as possible, and some respondents also reported reducing office space to cut costs. Startup fundraising during a tech downturn 83% of Sifted readers told us that they think it’s going to become more difficult to raise money in the near future, and several said they’re considering revenue-based financing instead of traditional VC. “We have lowered our expectations of funding amount and valuation.” Eighteen respondents told Sifted that their startups are currently raising a round, with the majority reporting investors becoming more cautious and increasing due diligence. Others said that the cost of capital has gone up considerably. “We haven’t changed our pitch,” said one founder, “but we have lowered our expectations of funding amount and valuation.” The heightened scrutiny on investments has been a positive for companies with “good fundamentals”, according to one founder, as it allows them to stay above the “FOMO noise”. Seventeen Sifted readers said they’re planning on fundraising in the near future. A number raised concerns over the amount of equity they’d be required to give up and expected to have to put more emphasis on how the business would make money when pitching. But one founder was confident about the market’s ability to rebound quickly. “At the moment the situation is very uncertain, but it will change in the autumn,” they said. “I’m stressed and it feels like I have whiplash […] previous milestones have changed overnight.” Pressure from investors 41% of respondents told Sifted that they’re under more pressure from investors to reach profitability, which has led to some founders feeling less secure. “I’m stressed and it feels like I have whiplash,” said one. “Previous milestones have changed overnight, and there’s no recognition for hitting the milestones that were previously agreed upon.” Another told Sifted that while their startup has “a very close relationship with all shareholders who are active in the company, the go-to-market targets and deadlines are continuously being moved, creating friction”. Others, however, said the increased focus on profit is “understandable” and has “been a positive, providing clarity for the leadership”. Are founders and startups operators concerned? While there is an expectation that things are going to get a little trickier before they get better for most startups, panic hasn’t set in just yet. But founders with less runway are worried. “Even with significant cuts,” said one founder with six to twelve months cash in the bank, “I’m concerned we don’t have enough runway to weather the storm.” Others think that whether or not the company can raise its next round will be make or break. “If we can raise our seed, we’ll be okay for this downturn,” one respondent said. “If we can’t — it’s all going to end very quickly.” Some founders and startup operators, however, are less concerned and see the market as levelling out after a whirlwind two years of inflated valuations and shotgun investments. “Current economic uncertainty is over exaggerated,” said a founder. “It is difficult for late-stage companies with bloated valuations, but most of the fear we see in the market is from VC funds that invested in 2020-21 [because they were worried about missing out on the best deals].” “Seasoned investors and companies are going ahead with business as usual, in terms of diligent investing and lean building,” they added. “The economy isn’t bad, it’s going back to normal,” said another. “The last few years have spoiled founders.” Kai Nicol-Schwarz is a reporter at Sifted. 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