2023 was an uncertain year for business growth thanks to sluggish economic growth, high inflation and mass layoffs across industries. Given that a recent 2023 year-end report from Crunchbase noted global startup funding hit a five-year low, it would be understandable that startup founders may be more reticent to launch new ventures in 2024.
This is underscored by the fact that more than 3,200 venture-backed startups have folded, as reported by Pitchbook.
But is this a sign that tech markets are dying? Or is it a much-needed reset in response to a lockdown-induced hype cycle?
An increasing number of investors are leaning toward the latter, suggesting that the current downturn is more nuanced than headlines may suggest. We had the opportunity to learn more about why this may be the case and what founders can do to stack the odds in their favor.
For many investors, the recent lull in investor activity should actually be seen as welcome news within the founder community.
For Brad Zions, Founder of Pitbull Ventures, the current macroeconomic trends aren’t out of the ordinary. “2021 and 2022 represented a recent peak of so-called ‘free money’ where people were funding anything. There was a lot of behavior that I found extremely frustrating as someone who’s kind of been through multiple market cycles,” Zions commented.
He continued, “People were raising massive amounts of venture funding. It was very difficult to differentiate between the best companies and the not-so-good companies because everybody was getting funded.”
This is a sentiment echoed by Umesh Patel at Thomvest Ventures, who recently noted that “Firms fueled by FOMO-driven investing contributed to inflated valuations, leading to a reckoning where many startups will either be shut down or sold as acqui-hires.”
Indeed, activity may be at a low when compared to the aforementioned boom years, but venture capitalists still invested a very sizeable $285 billion in 2023. And while investors may be placing their bets more cautiously at the moment, 2024 is likely to offer founders several favorable odds.
According to Zions, today is actually an ideal time to launch a new venture and predicts that 2023 and 2024 are likely to become so-called great “vintage years” within the cyclical world of venture capital.
While it’s true that founders will be expected to pass a much higher bar and may receive lower valuation than would have been the norm three years ago, they will also face less competition as the mania that previously limited the best ideas from rising to the surface subsides.
“In 2021 it was “grow, grow, grow, grow,” said Jenny Lefcourt, a general partner at Bay Area-based seed investor Freestyle Capital.
“While the bar is higher to raise funding these days, I think it’s so much better for a company who gets to start in this environment,” Lefcourt concluded.
Another truth is the fact that it’s become easier to hire and retain talent for startups. Zions expanded, “Historically a lot of the best companies around are born in what the VCs would refer to as great vintage years. A couple of years ago, things were so crazy. Before all the layoffs, both public and private, you couldn’t even hire qualified folks, it was very difficult to hire engineers but now there’s talent available.”
He was also keen to point out how the recent leap forward in off-the-shelf AI tools is set to benefit aspiring founders.
“A huge percentage of engineers are now using Microsoft Copilot. This takes care of a lot of the repetitive stuff and is massively speeding up the process. This is a highly interesting development as it means companies can build more product with the same amount of engineers, or they can build a complete minimum viable product with only one or two engineers, something that would have taken five of 10 in the past,” he expanded.
In short, he predicts this means founders are set to benefit from an increased agility that will let them explore potential in highly specific niches or industries.
When the vast majority of the globe is feeling the very real pinch of the economic downturn, it’s easy to get carried away with headline reports on market activity.
Yet if we scratch below the surface a little more deeply, it’s clear that those with an entrepreneurial spirit and tangible business offerings shouldn’t wait to court the attention of investors in 2024.
Featured photo of Brad Zions
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