"Zoom-out, it all makes sense" Vol.3: time for underdogs to take over

For a long time, limited partners (LPs) have been pouring tones of money into VCs and these into startups that had a focus on advanced technology. The promises of exponential businesses through synergies exploitation were utterly sexy. But there was a problem: under delivery. Now, there is a perfect storm about to hit a lot of tech startups that will lead to an oligopoly of providers - the survivors, those few who have done business right, will be the real unicorns (whichever their valuations).

Most of our original peers, hot startups highly funded, have gone bankrupt some years ago already. I remember having to justify our advisory board why we considered those to be our competitors when they had millions in funding and hundreds of employees while we went all down for bootstrapping. A priori, the comparison looked too ambitious. And we were ambitious. But not stupid. There were a couple of arguments that made us think we could beat them at any project, any time:

1. Applied science judgement: most tech opportunities imply innovation and most innovation implies applied science which is not a well understood game. Pouring money into a company, like those peers, didn't mean they could reach applied science judgement - machine learning, learning-adaptive machines, economics, change resistance, game theory, small-data-matters-too, regulation, transparency, model risk minimization, synergies exploitation, creativity, credibility, eloquence... It is more likely that you will be fooled by someone who pretends to have it. And this person will typically try to hire someone wishing she knows better just to become her broker with the senior management. At this point, these startups become pretty much incumbents.
2. Timing: the only difference with the incumbent is that these startups are short of time while incumbents benefit from previously gained momentum. But the momentum of the latter, i.e. the momentum of these startups' clients, also means silos, politics, legacies and change resistance. Hence, ad-hoc solutions and patience are a must. And precisely that, patience, is what investors don't have.

So these were the reasons why we soundly thought we could play the game better than such peers - we had a right to win. In fact, we were further betting that our widely media covered peers were born to die in 3 to 4 funding rounds, really. They were successful to the eyes of many (marketing) yet they were set to struggle delivering for both clients and investors.

Still, even if we were right, we knew that marketing is such a powerful tool that no matter how many times we had to remove peers from our list there was always going to be a new hot company adding noise in the industry while going through the same whole cycle.

Up to a point: markets correction.

Nasdaq is currently being heavily hit (growth reductions at bigtechs and fires round the corner), same for cryptos (including well-known stablecoins since most, as we always warned, are mere hedges instead of monetary policies), NFTs were largely a pump and dump scam (#respect to the digital artists though)...

So it seems that LPs are not in the mood anymore to trigger the funding waterfall explained above. There is obviously controversy around whether this is right or wrong but, no matter what, it is becoming the new hype. And when there is a hype there are consequences.

Who will be the startups that survive the next funding winter?

As usual, those that played right the timing strategy. Those cold-minded enough to wait as a trader for this to happen. There can't be many as surely it wasn't easy to avoid the siren songs these many years in order to build steady scale ups. Those that are diversified in terms of business instead of laser-focused, by the way. And, definitely those that have spent these years building a tech asset that takes that, years to build, so that they now have a strong position and a barrier-to-entry against their competitors.

Funnily enough, they can now consider funding in order to kill it as they have a massive opportunity to rapidly take over the space that the rest are going to leave empty.

What do I expect hereon? I expect the best startups to have non-linear demand across clients. I expect long-term partnerships to be seek by incumbents in order to leverage the natural selection - including some partial buy outs. This is quite a game changer as having insightful providers with negotiation power will help incumbents fight their own change resistance - similar to the role of blockchain behind the scene within global industries.

And all this because, in the end, if anyone wanted a truly significant KPI across startups, I'd say the best one is survival.

Thanks for reading!