October 2, 2022

Volume XII, Number 275


September 30, 2022

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Five tips for startups to thrive in the coming downturn

It does not take a genius to take notice of the changing face of the technology economy. When the largest social network in the world announces the slightest drop in growth – indeed, when it announces double-digit decreases in numerous financial indicators – one can be assured that the rest of the technology world is facing hardship. Are we facing an economic downturn? We have seen valuations drop over the past few months, IPO plans canceled and delayed, SPACs sputter, stock prices tumble, inflation catapulting, and interest rates rise for the foreseeable future. While all these factors create issues for businesses across the board, they can be even more difficult for startups.

Startups are facing a broad range of difficulties today. Valuations are lower, making fundraising increasingly difficult, and at the same time, interest rates are rising to combat inflation. This makes it more expensive to borrow money. There is also the fact that labor is more costly today, and with jobs readily available, the competition for talent is much greater than a few years ago. And we cannot ignore the fact that significant supply chain issues still exist over two years after the start of the pandemic, coupled with the fact that inflation has made all goods more expensive.

This can seem daunting for founders looking to grow, build, and take their startup to the next level. Today's biggest tech companies were born as startups in the darkest of recessions. It might seem implausible in today's environment, but it can be done. Venture capital funds have raised more capital in 2022 than at any time in history, and funding remains plentiful. While the volume and value of venture capital investing are set to decline in 2022, numbers remain at historic pre-pandemic highs. To navigate business forward or achieve their exit goals, we wanted to share some strategies and solutions:

  1. Conserve Cash – It is always important for startups to be conservative with their spending, but it is more important today as many face lower valuations and slower growth. Tightening control over cash going out the door can help extend your runway and delay the need for additional funding. Look at where you can cut costs. Are there contract or third-party services you can bring in-house? Do you have contracts that can be renegotiated? How can you operate more efficiently and cost-effectively? Examine all avenues to control your spending.

  2. Focus on Employee Retention – Onboarding and training new employees can be costly; today, hiring new talent can be challenging. Therefore, startups must focus on retaining their talent. In this kind of competitive job market, competitors often approach top talent with lucrative offers. The greater the focus on keeping your employees happy and offering a sense of security, the better you are to retain them for the long term.

  3. Retain Customers/Users – This might not be a time of significant growth for many startups, but as new prospects take longer to close, focusing on keeping the customers or users you currently have is that much more important. This means deeply understanding who your customer is, who is utilizing your product or service, and why. When you have that information, you can look for ways to create loyalty among your customer base and focus on expanding your reach.

  4. Consider Alternative Financing – There are numerous alternative financing options available for startups who absolutely must bring in new funding now but cannot secure venture capital. There are non-dilutive government agreements, loans, venture debt, and shared earnings agreements, along with several other options that might work well at this time. 

  5. Is it Time to Sell? – M&A is picking up as companies seek to acquire targets at lower valuations. This might not seem ideal, but it might be the best option for those unable to bring in additional funding. It is important to note that even though valuations are lower than a few months ago, acquisition multiples are still higher than pre-pandemic levels.

We have faced economic downturns in recent memory, and we have seen companies successfully reach the other side. Each startup is impacted by all these factors differently and will need to assess what works for them individually. However, by putting best practices into place and carefully considering all options, it is possible to make it through even the most challenging economic climate.

© 2022 Foley & Lardner LLPNational Law Review, Volume XII, Number 210

About this Author

 Louis Lehot Private Equity Attorney Foley and Lardner Law Firm

Louis Lehot is a partner and business lawyer with Foley & Lardner LLP, based in the firm’s Silicon Valley, San Francisco and Los Angeles offices, where he is a member of the Private Equity & Venture Capital, M&A and Transactions Practices as well as the Technology, Health Care, Life Sciences and Energy Industry Teams. Louis focuses his practice on advising entrepreneurs and their management teams, investors and financial advisors at all stages of growth, from garage to global. Louis especially enjoys being able to help his clients achieve hyper-growth, go public and to...