Operating in “In-Between Times”
With inflation and job growth slowing, talk has turned to when will the Federal Reserve stop tightening to when it will start easing. On Monday (8/14), for example, Goldman Sachs economists were among the swelling flock of Wall Street analysts who announced their view that the Fed will start easing rates in the second quarter of 2024. It’s fair to say, therefore, we’re in a period of “in-between times” – somewhere in-between tightening and easing but now leaning towards easing.
Until the Fed takes definitive action, this in-between time will be precipitous for startups. While capital remains available for high-performing/high-profile upstarts, before funding begins to flow more freely, startups in all stages will have to demonstrate a commitment to good old fashioned business fundamentals – proving product market fit, showing GTM-traction and an adherence to profitable business models. In sum, the infamous “coin operated model” means focusing less on the “sizzle” and more on the “steak.”
During these in-between times, emerging companies would be wise to consider some time-honored advice for success in rational markets, such as:
Manage expectations on valuations - aim for reasonable increases rather than huge jumps in valuation, especially if you are a hot company. Avoid over-inflating your valuation. It’s better to start with a restrained valuation and increase it gradually than to do radical valuation spikes that are at the whims of the market.
Scrutinize first-time VC investments – especially those in the AI space – look for investors with proven track records and business discipline. Be wary of those chasing trends – like generative AI – and focus on creating a profitable business that addresses real-world challenges and opportunities
Focus on fundamentals like product-market fit, unit economics, and path to profitability rather than hype. These things are never out of style regardless of what market state we are in. You can’t go wrong by building a defensible and sustainable business.
As in-between times evolves into a period of growth, we will start seeing investment behavior by VC and PE begin to shift toward higher valuations – especially on hot deals; more audacious first-time investments, and the re-emergence of flavor-of-the-month technologies and funding events. All boats should rise in this type of environment, especially the boats that were built for the long-haul, not those focused on the latest wave.
For VCs, we expect the situation will follow previous, post-apocalyptic investment periods – like the one following the first Internet bubble-busting – where they will:
double-down on their portfolio stars
start making smart, new investments
do fewer down rounds and bridge financings
dispatch the verified zombies in their portfolios, and
make painful messy cap table clean-ups
As the economy transitions it will be those companies that are driven by fundamentals with a goal of generating tangible business value that will succeed. By focusing on business fundamentals, market fit and measured – profitable - growth, the promising startups and the VCs who back them will endure during these in-between times and position themselves for business acceleration as we come out of it.