Finance ≠ the Economy: What Startups Need to Know
When the S&P hits record highs while tech companies announce layoffs, there's a simple explanation: financial markets and the real economy are different animals. For angel- and VC-backed startups, understanding this split is crucial for survival.
Markets vs. the Real Economy: What Founders Need to Know
Financial markets react to short-term signals—liquidity, speculation, and sentiment. The real economy moves slower, driven by employment, productivity, and actual consumer demand. Your startup sits at the intersection, where customer traction meets investor confidence.
Why Market Highs Don’t Mean Economic Health
This scenario brings mixed signals for startups. Capital becomes easier to find, but with stricter terms. Public market gains make angel investors feel wealthier and LPs more willing to back VCs—though they often stick with familiar funds rather than taking new risks.
Rising public valuations also reopen M&A and IPO paths for startups with strategic value, even those with modest revenue. The downside? Inflated valuations empower tech giants to outcompete startups on compensation, escalating the battle for engineering and sales talent and skilled professionals.
When the Economy Grows but Financial Markets Fall
Here, startups face the opposite challenge. Real customer demand increases as companies budget for innovation and efficiency tools during GDP growth. But falling public market valuations cause VCs to both slash startup valuations and slow deal-making, often forcing painful down-rounds even for companies with strong momentum.
The silver lining? Market contractions free up talent as public tech firms and late-stage unicorns cut staff, creating hiring opportunities for scrappy startups.
How Funding Stages React Differently
Angel and Pre-Seed: These investors operate on conviction and personal liquidity, making them less sensitive to macro conditions.
Seed Stage: Somewhat more exposed to market conditions, especially if their LPs are mark-to-market sensitive.
Series A and Beyond: Macro conditions dominate. Valuations, check sizes, and deal speed all track closely with public market multiples.
Understanding VC Fund Dynamics
VCs operate on ten-year lifecycles and must deploy capital regardless of market conditions or risk underperforming their vintage year. During financial stress, however, they focus on existing portfolio companies, slow new investments, and renegotiate follow-on terms. This means founders need defensible narratives backed by clear data, not just enthusiasm.
The slowdown in exits has put significant pressure on VCs, prompting them to adopt new strategies—such as shorter fund maturity periods—when raising capital.
VCs are extending fund lifespans beyond the traditional 10 years and continuing to invest in later-stage portfolio companies—effectively enabling them to 'go public while staying private.' It offers early stakeholders a path to liquidity, while institutional investors—VCs, PEs, and growth funds—remain invested, holding out for improved market conditions and a larger return.
Your Startup Playbook
Run Dual Narratives: Develop one story that's macro-agnostic (focused on solving customer problems with clear traction) and another that's macro-aware (explaining how different economic scenarios affect your burn rate and runway).
Raise Early: Secure capital before you desperately need it. A slightly lower valuation today beats betting on an uncertain future up-round.
Diversify Your Pipeline: Spread customers across industries and geographies to hedge against sector-specific slowdowns.
Build Must-Have Products: In volatile times, customers cut nice-to-haves but budget for tools that save money or generate revenue.
Create Cap Table Flexibility: Include super-pro-rata rights for early believers and clean SAFE notes with most-favored-nation clauses to smooth future bridge rounds.
Conclusion
Financial markets reflect sentiment, the economy drives real output, and startups build the future. Each follows its own rhythm.
Use market trends to time fundraising and exits, and economic data to gauge customer behavior—but stay anchored in your own metrics like retention and CAC. Chasing headlines leads to overreactions. Founders who stay focused and adaptable outperform, no matter the market mood.
Hope you have a great July 4th and get some well-earned downtime this weekend. Let’s come back strong next week.