If you’re a startup founder or investor in tech, it’s understandable that you’re feeling more somber than usual looking at the landscape for 2023.
The news from big public companies hasn’t been encouraging. We‘ve seen an almost endless string of layoff announcements, cutbacks on funding for new initiatives, and general cost-cutting across the board. Later-stage startups and unicorns have been announcing layoffs and cost-cutting as well. Successful venture capitalists, like Hunter Walk at Homebrew, have been warning that 2023 will be a year of startup wind downs.
As someone who has been both an operator and an investor through three previous tech downturns, I still believe there is some good news for startups in 2023. Remember, as bad as the tech bust of 2000-20004 was for venture-backed startups, many of the best companies of the past 20 years were founded in that aftermath. LinkedIn was founded in 2002, Tesla in 2003, and Facebook in 2004.
While 2023 will test the mettle of everyone in the startup ecosystem, these three opportunities will help the startups that survive this downturn thrive in future years.
1. LESS COMPETITION FROM BIGGER COMPANIES
In the boom of the last 5 to 7 years, the length of time between a startup getting funding for an innovative new product or service and bigger incumbent companies spinning up efforts to go after that market was quite short. Not anymore.
Every startup is a race between the time it takes for the startup to get distribution and the time it takes incumbents to get the product innovation. With these cutbacks, many startups will be given the gift of a longer head start.
It will be harder for employees to get larger companies to fund new initiatives that aren’t immediately profitable. It will be harder for companies to invest heavily in new products that don’t match the profitability of their existing core businesses. It also will be harder for companies to justify acquiring a copycat to speed their entry into a new market.
Founders can spend less time looking over their shoulders and more time focusing on their real challenge: delivering value to their customers and expanding distribution.
Fifteen years ago, when Web 2.0 was just starting to boom, there were endless stories about how Web 1.0 giants, such as Yahoo, had earlier killed similar products in the aftermath of the 2000-2004 bust. Have no doubt, similar stories will be written in five years as new unicorns and decacorns are crowned. Their loss is your opportunity.
2. LESS COMPETITION FROM STARTUPS
One of the funniest and yet repeatable dynamics that we see in Hollywood is two different studios backing almost identical movies at the same time. When it comes to venture-backed startups, however, there is a serious price to pay when too many startups are funded going after the same market.
Over the last decade, we have seen an incredible boom in the number of venture capital firms, which means there are far more investors than there used to be. VCs have promised their investors that they will invest the capital into startups; and in frothy markets, they put that capital to work quickly. As a result, the reward for a startup receiving attention from investors and customers can be a significant number of well-funded competitors. These battles can not only raise customer acquisition costs and increase churn, but they also can split the market in such a way that no startup reaches escape velocity.
The good news for startups today is that in tight markets like 2023, investors are much less likely to follow this pattern. They have more time for diligence and to ask hard questions about differentiation and go-to market. They spend more time looking not just for a company to back, but the best company to support.
In the aftermath of 2000-2004, many great firms, such as Greylock Partners, decided it was better to invest in the Series B of winners, like LinkedIn and Facebook, than to pursue a Series A of a copycat. Don’t be surprised if you see this same pattern again.
As a result, if your startup navigates 2023 successfully, it’s not only much more likely that you’ll have a relatively clear field to run in when you break through, but you’ll also have a higher-quality list of investors beating down your door to invest in your next round.
3. IT’S EASIER TO HIRE GREAT TALENT
For venture-backed startups, hiring stellar people is always difficult. In hot markets, it’s even more difficult. The cash and stock offers from large technology companies look both immense and low risk, and for talent looking for a startup, there are thousands to pick from.
The layoffs at large technology companies have taught a valuable lesson to a new generation of engineers and designers. Employment is not guaranteed, and layoffs can come without warning. The stock prices of large companies don’t only go up, and when they go down, they can go down 50%, 60%, even 70%.
Now, risk aversion is very real in down markets, and as a founder, you may find it harder to convince people that your company is viable and that you have the potential to build a business that could be worth billions someday. But you now have a real opportunity to recruit talent that would not have listened to your pitch previously.
At Daffy.org, we’ve already hired three new engineers in 2023, two from troubled startups, and the other freed by a big tech company with recent layoffs.
One of the reasons that Web 2.0 winners like LinkedIn were so formidable is that they were able to attract incredible amounts of talent, both from startups that failed and large public companies where trust was broken by layoffs and stalled stock prices. Startups that have been built to support remote work were built to take advantage of the tumultuous talent market of 2023.
PLANT TODAY, REAP TOMORROW
In some ways, tough markets like the one technology startups face in 2023 can feel insurmountable. Building new companies is incredibly difficult under the best of circumstances, and the nonstop drumbeat of bad news can bring down even the most upbeat entrepreneurs. But if you look at the aftermath of the 2000-2004 technology bust, there is a lot of room for optimism. The reward for startups that navigate these years and build great businesses will be larger as the seeds of their future advantage are planted now.
History doesn’t repeat, but it sure does rhyme a lot. Keep building.