In the last few years, tech startups have undergone a major shift in their mindset. The era of growth at all costs and easily accessible venture funding is over.
The focus now is on demonstrating that the company can grow, but in a way that is profitable and efficient, without needing additional investor dollars.
“Given the tightness of venture capital purse strings, we are running Kevala in order to turn profitable within our terms,” stated Todd Owens co-founder and CEO, Seattle-based software startup. “We are still evaluating every investment.”
Venture capitalists have slowed down their investment in for the entire 2023 period due to a combination of factors including higher interest rates, persistent inflation and other market factors. This follows record levels of startup funding in previous years.
According to PitchBook, the quarterly deal value in 2024 will be the lowest since 2018.
“Only high-quality companies with solid unit economies, a strong product team, and differentiated products are able to obtain equity funding in the current climate,” said Kaidi Gao a venture capitalist analyst at PitchBook.
Even for those who can raise more money, it is not always beneficial. According to Carta, nearly a quarter of the new deals were “down rounds” or raised at lower valuations than previous financing infusions.
“Today’s funding environment is still quite unreliable,” Kellan Carter said via email. FUSE is a Seattle-area venture capital firm. “Founders can choose from three funding vectors: raising external capital, securing capital from insiders and reducing the burn (funding business with revenue).”
Y Combinator’s co-founder Paul Graham coined “default alive” as a term in 2015 to describe a company that does not need to raise new funding to grow.
Graham wrote, “Assuming that their expenses remain constant, and their revenue growth remains the same as it has been for the past several months… do they make it to profit on the money they still have left?” “Or, to put it more dramatically, do they live or death by default?” Graham wrote in 2015.
Carter said that getting to default alive is a way to “achieve a sustainable and self-sufficient trajectory of growth and to drive to an exit on a timeline which makes sense for the company.”
The Seattle-based startup’s CEO and founder, Joe Duffy said that keeping a close watch on business fundamentals has helped pulumi to grow in a sustainable manner over the past few year. The 7-year old company raised $40 million in October.
Duffy said, “Eventually, a business must make more money than they spend and allocate this profit to responsible growth or shareholder returns. Many people forgot this during the era of growth at all costs.”
Some companies haven’t been able survive. Seattle startups such as leadership community platform Round, campervan rental business Cabana and digital memory archive company Lalo have all closed down in the last year. They cited an inability to raise additional cash as their downfall.
Convoy , a trucking marketplace that had been valued at $3.8 billion just a year and a half earlier, collapsed in late last year.
In recent years, many other so-called unicorns failed despite raising huge amounts of capital.
“To me, profit (or a path to it) appeals more than unicorn status,” said Kevala Owens. How many unicorns have been created in the last few years? Not all of them. For the first time, perhaps more will fail than succeed. “I hope I’m mistaken, but only time will tell.”
It can be beneficial for startups that can weather a storm to build a company with a focus of frugality.
Sunny Gupta who co-founded Apptio, a technology business management firm in Seattle in 2007, said that the company would not have achieved the same success — it went ‘public’ in 2016 and was sold in 2019 for $2 billion — if launched during the 2008 financial meltdown.
Gupta, speaking at TiE Seattle in early this month, said that the tool helped him to focus on his value proposition. “ROI was extremely important. People didn’t spend money. “It’s not much different from what’s happening on the market today.”
In 2014, Jensen Harris, a former Microsoft executive Jensen Harris, helped launch the Seattle startup Textio. Harris, who was recently appointed CEO, said that flexibility and adaptability are important to navigate through macro-environments.
Textio originally built AI software for recruitment use cases, but now focuses on a wider set of HR functions.
“We’ve persevered throughout these cycles by focusing our efforts on building products that solve problems and being open to evolving as needs change,” said he.
Ambika singh is the CEO and co-founder at Armoire. She launched this Seattle-based clothing-rental business eight years ago. She has guided the company during periods of growth and also setbacks.
Armoire’s business has recovered in recent years, despite the pandemic. Armoire opened a 30,000-square-foot warehouse south of downtown Seattle earlier this year.
Singh said that one of the biggest changes in recent years with regard to growth has been making more calculated bets. She said that the willingness to “live without our bank account” has decreased.
Singh said, “You’ll move into the big storage when you can afford it.” “That’s a different way of thinking about it than we used to.”