Slowdown Spells Doom for Startups?

Slowdown Spells Doom for Startups??

For over a decade, tech startups ruled the entrepreneurship space. Innovation was celebrated, funding was abundant, and skilled techies vied with each other to work in the buzzing energy of startups.?

Yes, startups had some very good times. These were the times when startups could take big corporations head-on and disrupt the markets. Startups were revered and they damned right worked to deserve it.

After tasting inconceivable success, startups such as Lyft, WhatsApp, and Uber, all fuelled the startup dream that many harbored. Not saying that the founders didn’t have to put in the effort, but the conditions were favorable and success came easier to those with strong potential.

Then why is it that suddenly it seems like the beginning of the end of the good times? I’ve explored some reasons why many have been heralding the doom of startups.

1. The Economy is seeing a downward trend???

Once we recovered from the economic crisis of 2008, we have seen generally good times. The economic conditions favored startups and investors were willing to pump money into exciting ventures. With better opportunities for funding, readily available capital, and consumer confidence, startups flourished.??

But then, the pandemic hit. The Russia-Ukraine war came next. While we were in the midst of the pandemic, some startups scaled and grew. But in the post-pandemic era and a global economic slowdown, we have economic instability and uncertainty to deal with. Some economists even suggest there’s an impending recession.?

There’s a growing fear among entrepreneurs and leaders over the slowdown which is translating into job cuts and offer revocations. Elon Musk saying that he has a “super bad feeling” about the economy has got the entire tech industry in a tizzy.??

While we will need to wait and watch how the situation unfolds, the optimism that ruled the economy is definitely wavering.

2. Startups are cutting costs

Advisors and experts are indicating that startups need to cut costs now, or at the very least spend conservatively. While earlier, startups chased growth and planned strategic scaling, the focus has now squarely shifted to profitability. This is also due to VC funding drying up, rising inflation, and higher interest rates.

Startups are scrambling to break even and show profit margins and are in a rush to cut costs as a survival mechanism. Uber has had to cut down on their marketing spend to cope with the changing economic scene. Even big names like Salesforce and Meta have announced a hiring freeze. And global startups such as Cameo and Thrasio have started layoffs to cut costs. Operations are being scaled down in several startups in a bid to reduce the risk of going under.?

3. VC funding is drying up

The cash flow just isn’t that great anymore. Investors are also scrutinizing gross margins like never before and their enthusiasm for investing seems to be waning. It is no longer about growth at all costs, but about sustainability and gross margins.??

Owing to this trend, VC funding is as good as drying up causing a huge slack in the growth market. As Matt Turck of First Market Cap puts it, VCs are cutting back investments and only taking safe bets, which means new startups are no longer on their radar for investments.

There’s also a strong indication that Softbank will cut its investments by over 50% this year, after a slow year. According to Softbank CEO Masayoshi Son, the investment in this fiscal year could even be just 25% of what it was last year. Joining Softbank are other investors like Tiger Global and Dragoneer.

4. Innovation is difficult to attain

Tech startups thrive on innovation. The previous decade saw technological disruption with web and mobile, which were fairly accessible to startups. But now AI, ML, Internet of Things, Crypto, and AR/VR rule the roost.?

As startups are resorting to layoffs, hiring freezes, and other cost-cutting methods, growth takes a backseat. The skills gap at startups is steadily widening. There are simply no resources to drive innovation. But while the startups bide their time, the large enterprises might make a headway on the innovation front.

When the startups eventually come out of survival mode, it might be difficult for them to catch up with the big boys in terms of innovationm and the skills gap might be too wide to fill. Startups need to continue to innovate by exploring ways to pursue growth in a phased, cost-efficient manner. The problem is, many might not be able to achieve this.

5. The skills gap is widening

Apart from startups not being aggressive in hiring, there’s another major shift in the industry. The tech talent is not looking to work for startups with the enthusiasm that they have shown previously. The looming risk of layoffs and the downward trend of valuations are making potential employees skeptical.?

Also, niche tech skills are severely in short supply. Without meeting the demands of tech talent, tech startups are facing a hard time scaling and growing.?

The other reason for the widening skills gap is that hiring tech talent is expensive and startups now seldom have the budgets due to the reduced cash flows. Add to this the fact that the big players in the tech space are hiring and growing, making it all the more for startups to thrive in the competitive environment.

Is this all simply a market correction after all?

If we look at the numbers, VC investing in the US has doubled year-over-year, with 2021 seeing a massive investment of $329.9 billion from $166.6 billion in 2020. When this exorbitant amount was put into the startup economy, there was a boost in hiring and acquisitions.?

However, these actions were hasty and were riding mostly on the influx of capital rather than being carefully planned strategies. The result was an added pressure on startups to grow. Some succumbed to this pressure and that was probably the start of what we perceive as the startup economy downfall that we are seeing.?

It is very well possible that this is only the inevitable market correction that will slow things down from the dizzying pace of the previous years.?