In 2021 and in early 2022, startups experienced an era of wild optimism. Capital was still plentiful and cheap, and business buyers were heavily into experimentation, making it a great time to be a startup. But all of a sudden in 2022, the wind changed, inflation reared its head, the Fed raised interest rates several times, and money became much more expensive. Buyers became uncomfortable, buying cycles suddenly lengthened and startups began to feel the pinch.
There is a simple law of economic physics: Generally, the economy rises, falls, and eventually bounces back. But as we approach the middle of the last quarter of 2023, and some of the economic signals have improved, is it reasonable to expect that we will see a recovery in which startups can once again thrive?
It may not be so simple this time. While IT budgets are predicted to improve in the new year, that doesn’t necessarily mean startups can take advantage of that money. Don’t forget so much major technology suppliers raised prices this year, further complicating things for startups looking to get in on the action. Companies may be forced to invest more money in existing line items.
All of these factors and more have led to a continued shift from growth to efficiency, forcing many startups to tighten their belts to reduce costs. The primary way to do this was to lay off employees and generally try to get as lean as possible, but that has its own problems. Startups, especially early-stage ones, already have an all-hands-on-deck approach, and downsizing means they have to do the same job with fewer people.
As we approach 2024, what does all this mean for the startups that managed to get out this year? Can they expect things to improve next year or could it prove to be even more difficult than last year?
It depends who you ask.
Rough seas ahead
Scott Raney, managing director of Redpoint Ventures, has been doing this for more than 20 years, and says the environment we’re seeing now is less about a recession than a market correction from unrealistic valuations in 2021. We’re just seeing a return to the more rational levels.
