Companies that survive the current tech beatdown will be positioned to thrive in a saner, and healthier future to come.iStockPhoto / Getty Images
Alexandre Lazarow is a global venture capitalist and the author of Out-Innovate: How Global Entrepreneurs – from Delhi to Detroit – Are Rewriting the Rules of Silicon Valley.
With the current beatdowns in the technology industry, there is a certain feeling that the tide is starting to go out, and as the Warren Buffett adage warns, we are starting to see who has been swimming naked. Startups often look like the pebbles on a beach, crashed upon by waves. But that’s okay.
As the tide recedes, we’ll see which get washed away, and which have built boulders in the sand. Those that remain will be positioned to thrive in a saner and healthier future.
The long-standing approach has been to focus on growth at all costs – sacrificing profit to capture market share. Not only has that not been a problem, it was essential to getting a startup off the ground in a winner-take-all competition for customers in industries such as social media, digital streaming and ridesharing.
With low interest rates and cheap capital came longer acceptable runways to achieve market consolidation and, eventually, profitability. In the past decade, more than 1,500 startups have reached unicorn status, valued at more than US$1-billion, in more than 100 cities.
But now, with the backdrop of rising inflation, macroeconomic uncertainty, the war in Ukraine and rising interest rates, the music has stopped for venture capital funding. More and more unicorns are having down rounds that strip them of their mythical status, and others that raised capital before the recent spike in interest rates are breathing a sigh of relief.
The previous short-term outlook of the industry had propelled the special purpose acquisition company (SPAC) boom – a vehicle expressly designed for back-breaking speed to public markets. Along with that had come the WallStreetBets and the FOMO (fear-of-missing-out) investment style in venture capital and publicly traded companies. Now there’s devastation across the land, even among the giants. Amazon, Alphabet, Apple, and Microsoft lost $2-trillion collectively in the past year.
Yet all is not lost, and this is not a bursting-bubble moment like the year 2000. The startups of today have real revenue and real customers – they are not Potemkin websites. Plus, the centre of the startup world is no longer focused in Silicon Valley. There has been a great dispersion of tech talent and funding. More prudent, sustainable and resilient approaches outside of yesterday’s tech bubbles are now the norm.
Startups have identified and are solving critical global problems. Neobanks like Chime (an investment I made at a previous VC firm) and broader fintech disruptors have taken the $30-billion overdraft industry head-on. And without fast-moving technology companies, everything from remote work to remote health care would have made managing the COVID-19 crisis all the more challenging. The drivers of innovation have become better understood outside of Silicon Valley, and startup engines are up and running, creating growth in places like Canada and around the world.
The tide always goes out, and we are starting to get a glimpse of the unprepared. But for those companies that make it out of lean times and built the metaphorical boulders on the beach, the long-term future is bright. The obvious has become obvious again. Business fundamentals matter. Proper diligence matters. Governance matters. Conduct matters.
While next few tumultuous months will showcase some big losses, we should remember that creative destruction is a natural part of the business cycle. For technology companies already built for the long-haul, now is the time to show their mettle.
Happy swimming.