Susan Moring, Principal at Cortado Ventures, explains the implications of a bear market and where startups should put their focus to find opportunity.
Facing a bear market as a startup or a VC investor can be daunting, but with preparation, opportunity can be found even in challenging economic times. By focusing on nailing the fundamentals and practicing discipline, startup teams can build resiliency and find themselves ahead of their competition.
Read on below for the full interview with our Principal Susan Moring.
Q: Although generally stressful, are there any areas of opportunity in an economic downturn for startups?
A: Absolutely. Economic downturns help weed out competitors that aren’t great at execution. It’s also important to remember that most companies’ customers are also likely experiencing some effects of the downturn. So if your product helps them increase revenue or cut costs, that’s a big deal and an advantage during a time when other startups may be facing significant challenges.
Q: What areas of their business should entrepreneurs focus on now, as valuations decline?
A: Fundamentals. Spend time with early customers and use what you learn from them to build a product that is so good they can’t imagine giving it up. Monitor margins and make sure your model makes sense. Figure out a repeatable sales process with profitable unit economics, and make sure that what it costs you to land a customer is worth it (LTV/CAC ratio is a common metric for this). Focus on monitoring burn and look for ways to cut costs in order to extend the runway.
Q: Where should they be spending less of their energy?
A: For a lot of early stage companies, scaling as fast as possible becomes less important in a downturn. It’s more important to spend time building early customer advocates and making sure the product and value proposition is sound. Spending time making a product sticky with customers makes you more resilient and your product stronger.
Q: Are you looking at new or different markers of success than you would outside of a downturn?
A: Not really. At Cortado, we try to be disciplined always, not just in a downturn. But I do think “hype” around a startup becomes less meaningful. In a downturn, more investors are likely to dig deep enough to see through hype.
Q: Are you anticipating longer runways or time to exit?
A: Yes to longer runways. Companies will try to lower burn to extend the runway. We’re also seeing companies reopen rounds or raise more money than they originally planned just to be safe. Companies want to be sure they have enough cash to get to a position of strength for the next round of fundraising in case the downturn is still ongoing.
Q: Are there any past examples of startups thriving in an economic downturn that are good case studies for today’s entrepreneurs?
A: Definitely — there have been many well-known, successful startups that began in a recession or found ways to thrive in one early in their lifetime, including Airbnb, Uber, and Groupon. This success against the odds isn’t limited to Silicon Valley, either — in fact, one of the most successful mobile payment companies, Square, began as a startup in the heart of the Midcontinent.
Jim McKelvey and Jack Dorsey built the tech conglomerate from a small office in their hometown, St. Louis in 2009, on the tail-end of the Great Recession. By focusing on serving their customers and building a product that small businesses couldn’t imagine not using, they found a way to thrive even in one of the worst economic downturns in recent history.