In 2021 and early 2022, startups experienced a time of wild optimism. Capital was still plentiful and cheap, and enterprise buyers were heavily into experimentation, making it a great time to be a startup. But quite suddenly in 2022, the wind shifted, inflation reared its head, the Fed raised interest rates multiple times, and money became much more expensive. Buyers got uncomfortable, buying cycles suddenly were extended, and startups began to feel the pinch.
There is a simple law of economic physics: In general, the economy goes up, goes down and eventually bounces back up again. But as we approach the middle of the final quarter of 2023, and some of the economic signals have improved, is it reasonable to expect that we’ll be seeing a recovery in which startups can once again thrive?
It may not be that simple this time. While IT budgets are projected to improve in the new year, it doesn’t necessarily mean that startups can take advantage of that money. Don’t forget that many major tech vendors raised prices this year, further complicating things for startups looking to get a piece of that action; companies may be forced to put more money into existing line items.
All of those factors and more have led to an ongoing shift from growth to efficiency, forcing many startups to tighten their belts to cut costs. The primary way to do that has been laying off employees and generally trying to get as lean as possible, but that, too, comes with its own set of problems. Startups, especially those in the earlier stage, already have an all-hands-on-deck kind of approach, and cutting employees means having to do the same amount of work with fewer people.
As we approach 2024, what does it all mean for startups that managed to ride out this year? Can they expect things to improve in the coming year, or could it prove even more difficult than the prior one?
It depends who you ask.
Rough seas ahead
Scott Raney, managing director at Redpoint Ventures, has been at this for over 20 years, and he says the environment we are seeing now is less about an economic downturn than a market correction from unrealistic valuations in 2021. We are simply seeing a return to more rational levels.