At the end of May, the tech-heavy Nasdaq 100 index was down nearly 30% on its 2022 peak.
We’re in a very different time compared to six months ago. Three months before the conflict in Ukraine, large companies were trading at twice their current volume. Analysts like to draw analogies between today and historical crisis moments like 2000/2001 or 2008/2009, but the truth is that we have never seen conditions like this before.
Inevitably, current events have influenced startups and companies in their approach to fundraising. Like other tech investors, Storm Ventures has a long-term horizon. What’s happening now doesn’t always affect our outcomes. We are playing a long game.
Over the years we have found that predicting the future is a useless exercise. For readers who are uncertain of the way forward, we would like to present some of our thoughts on how tech investors and founders can negotiate today’s choppy waters.
Lessons From the Pandemic
Back in the spring of 2020, investors and founders were incredibly concerned about their businesses. There was a palpable tension for several months as the workforce settled into the ‘new normal’ of repeated lockdowns. However, by the end of summer, many companies were exceeding their pre-COVID plans. Businesses that were heavily reliant on a physical, brick-and-mortar presence took the brunt of the cultural change.
By contrast, tech businesses performed well. In hindsight it became clear that if tech investors had panicked and made rash decisions at the start of the pandemic, letting employees go, that this would have turned out to be a grave mistake. That’s why at Storm Ventures we always encourage entrepreneurs to concentrate on what they can control, and try to ignore the overwhelming factors that fall outside of their sphere of influence.
Play Offense
In a tumultuous economy, it’s tempting to adopt conservative, defensive tactics. The problem is that playing defense doesn’t win games, as you need to score! Fortunately, you can alter your attacking strategy. Maybe you’ve been growing so fast that you haven’t been able to spend quality time with your existing customer base. As a founder, it’s likely that your focus has been directed elsewhere. This is important if you want to gain some useful insights and maneuver into a stronger position as you shore up your assets in the business.
Risk is Relative
In plentiful times, it’s to be expected that investors and founders will take more bets. Often you don’t really have a choice. You know that you have to play hard. Of course, this may cause entrepreneurs to make rushed decisions when it comes to hiring, which isn’t ideal.
In a more uncertain era, you have the luxury of slowing down and taking more time. You can adjust the risk aspect, which means that you don’t really need to be thinking about that adjacent market you were originally intending to explore. Maybe you don’t need to introduce that new product or hire as many employees as you initially wanted to — in the medium-term, at least.
Instead, you can find a smaller number of high-quality hires today. We always recommend this type of adjustment mentality, versus a wholesale complete left-turn in the business.
Is the level of demand or customer interest the same as a few months ago? Is your pipeline building in the same way? Are you seeing any changes in the field that might indicate forthcoming changes in buying patterns? At Storm Ventures, we haven’t noticed any changes. We’re still seeing amazing growth. However, we are keeping our ears to the ground because there is always a risk that conditions could change relatively quickly.
As long as the business continues to grow, then you should continue to operate it as such – with one major caveat. That’s the funding aspect. It’s a coin toss as to whether we return to a funding environment similar to 2021, or a different model emerges. You can see what happened in the public markets. That compression in value is certain to move downmarket into private companies.
There is a lag effect. After all, you don’t raise money every day, and it’s a fairly sporadic event when it does happen. Companies announcing their latest financing package today, especially if it’s a large round, are referring to deals that were put together months ago.
Most companies have a discretionary budget that covers marketing spend. It may not relate to lead generation, and sometimes involves areas like brand awareness. It is risky to dip into this budget, and it may not be worth it. Instead, you could dedicate those funds to shoring up your customer base.
Plan For Turnaround
Have some detailed plans in your back pocket so that you’re ready to step on the gas when conditions move back in your favor. If venture investors re-enter the fray with valuations close to what we saw last year, you want to make sure you’re prepared to take those bets again and drive a higher growth rate. You could make a point of recruiting one or two outstanding execs. You can also invest in your company culture. Many founders have accrued so many staff, they haven’t had the chance to meet them all yet!
This is a good opportunity to invest in your employees.
Communication is Key
Communication is fundamental. It’s paramount that you make an effort to communicate sincerely — whether that’s as a founder, CEO, board member, or executive. There is an understandable tendency to shy away from the spotlight when the time arrives to deliver bad news. In my experience, the key to dealing with these uncomfortable situations is to treat your employees sensitively.
Formulate a decent plan to recover and get performing again. If you’re transparent about the difficulties you’re experiencing (perhaps an unexpected failure with fundraising), you can build loyalty. Employees really do appreciate clarity. After all, everyone is worried and feeling on edge. Everyone has questions. Sharing your plans and making a point of being upfront helps to build respect, trust, and even excitement for the shared challenge ahead.
Good luck, everybody, as you prepare your business and regroup for the coming months.
Ryan Floyd is a founding Managing Director of Storm Ventures, where he invests in and works with early-stage enterprise SaaS startups.