Lessons Learned from the State of Silicon Valley Start-ups

I recently read a compelling article in Business Insider entitled, “Silicon Valley is bracing for a ‘Darwinian moment for startups’ in late 2023” (subscription required) on the current state of start-ups which did a great job of capturing the dynamics of what’s happening in the technology market today. The observations in the article resonate with me because I’m seeing a number of the points raised playing out in the cybersecurity industry first-hand, and they’re also being reflected in the conversations I’m having with cybersecurity leaders. While the article did an excellent job of outlining the reasons behind why start-ups will experience a “Darwinian” moment later this year, it also reinforced several key points for me:

• Start-ups can be a risky proposition in this economic environment - Start-ups are great at pushing the envelope and coming up with the “next big thing.” But when you’re operating in an uncertain environment - like we’re in today - that trailblazing spirit can turn into a liability for customers. When I speak with enterprise customers, many of them are seeking stability and consistency over the risk of simply “trying something new,” although they’re still keeping an eye on innovation. The reality is that today’s macroeconomic environment is causing enterprises to re-evaluate the companies they work with and with good reason. Market turbulence is resulting in a drought of start-up funding as VCs have become more conservative and calculated with their investments, which leads to increased pressure on other aspects of the business. Some of the side effects of this pressure include a short runway to profitability, shrinking investment in R&D and elimination of headcount, which can stagnate innovation and ultimately negatively impact customers. As a result, enterprise organizations must consider this when selecting which technologies and solutions to adopt as part of their IT stack and why going with an established player can have distinct advantages.
• Opportunity on the horizon in the form of AI - The article posits that only the fittest start-ups will survive and it asserts that the buzz and interest in AI may be enough to help start-ups that are focused on innovating in this area to succeed. Especially as new services and use cases are created and discovered, there’s no doubt that interest in AI will continue to grow. At Zscaler, we see AI and machine learning (ML) as huge opportunities because it will not only help us better secure companies’ IP and their customers’ data making it infinitely safer for them to do business, but also by operating the world’s largest security cloud, we have access to massive amounts of high-quality, diverse data which we use to teach the AI models that operate the systems to enable automation and streamline operations. Lastly, as we continue to innovate and expand our portfolio of AI/ML-based solutions, we are considering all angles when it comes to organic or inorganic growth. And while we are seeing some exciting technologies emerging from startups focused on AI, we will continue to exercise caution and due diligence when evaluating acquisition opportunities.
• The business model dictates everything - Before, when funding was more free-flowing, startups could pursue novel ideas without much thought given to generating new and recurring revenue. In some instances, this was almost an afterthought. But, in our current environment, “venture capitalists will shift their strategy to support their existing portfolios or companies that already have a potential to generate large revenue,” meaning only those companies that have a viable business model and proven track record will survive. In other words, the level of scrutiny for funding is higher, while at the same time, the pool of available funding is shrinking. For those start-ups that are no longer able to demonstrate viability, funding will be extremely difficult to come by and that will most certainly have a negative impact on their ability to innovate and their customers. Therefore, it’s important to understand how a company’s business model can have a profound effect on its sources of funding.
• There’s a lesson here for all organizations - The article quotes an expert who offers advice to start-ups trying to weather the financial crisis: "Clear focus and fiscal discipline." This is excellent guidance, but not just for start-ups; it applies to any company that wants to build up resilience in the face of market turmoil. We've always operated Zscaler’s business with a disciplined approach to growth and while we will continue to invest in key areas of our business to help our customers stay ahead of the curve amidst increasing competition, we will always do so in a responsible manner.?

I believe that we will continue to navigate macroeconomic headwinds for at least the remainder of the year and most likely into next year, but I also think that the tough lessons learned throughout this process will help us establish a stronger foundation for the future. We’re always smarter the second time around. And, it’s logical that vendors with a solid business model that run their operations responsibly with focus, fiscal discipline and integrity will be well-positioned to advance innovation and spearhead new technologies that will enable them to be more resilient in a rapidly-changing market environment.