Why Must Technology Startup Founders Not Cut Costs and Not Fundraise in the Medium Term?

PCA Ventures Partners
6 min readNov 11, 2022

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Some cracks appeared in the foundations of the startup economy in 2022. Despite the recent challenges, tech entrepreneurs persevered and build innovative companies. These past years, ambitious founders had hyper growth plans funded by larger rounds. More family offices, sovereign wealth funds and hedge funds joined their rounds. Along the traditional venture capital and private equity funds. Recently, as much cash flowed globally into promising startups as in IPOs. A whopping US$1.4 trillion last year.

On the back of those first-time startup investors pulling back, a lot of dry powder still needs to deploy. And well into 2023. Yet, IPO markets are now frozen after a valuation peak for private companies in 2021. Tech giants are laying off staff in droves¹. Now, as we enter the last quarter of 2022, the funding landscape has changed. There is less capital available to support these businesses. Or at worse valuations and terms than before.

How will tech startups fare in the current market downturn and a looming recession for 2023?

Hope for the best and plan for the worst?

No, tech entrepreneurs must focus on their revenues, and work more on their margins.

It is not a game of the next round saving the day anymore

The market tells startup: “You need to earn your living now …”

Raising even a dollar has always been tough for tech entrepreneurs.

Although there is still plenty of cash sitting idle, raising that dollar has become harder than ever. Especially for private companies not being profitable — or not even generating any revenue. And founders need that dollar to continue. They need more of it to grow. We do not pencil an exhaustive list about how startups generate their revenues, but businesses grow by

  • selling more products (or services) in existing markets
  • shipping (new) products to new markets
  • acquiring or merging with the competition

These days, the last item on the list is not a viable option anymore. With easy money gone and SPACs hanging out to dry, M&A has become very expensive. It always needed some external funding via debt, equity or a mix of it but these deals are not attractive right now.

VCs are becoming more picky about their investments. So startups need to focus on the first two items on the list. And on generating more revenues from their existing clients. They should walk on new paths to grow and strengthen their venture.

“… so get cozy with your clients”

Founders who try to cut costs to improve their bottom line often find that it is not a great strategy. They lose focus, time and resources executing such plans. Often these decisions jeopardize the good mood and high spirits of their teams. Asking staff and partners to do menial-but-necessary tasks is not profitable. Especially in the long run for outsourced tasks.

Maintaining high performance among all stakeholders is difficult in growing businesses. Finding the right processes and structure is also hard. When one area breaks away, it can quickly impede the effectiveness of the others. One way to solve this problem is to integrate Revenue Operations in a startup’s structure. A definition of Revenue Operations, or RevOps, shared by many in the industry² states that

Automating business processes through RevOps can help sales, marketing and customer service organizations make decisions that drive predictable revenue and promote growth.

Founders and investors (re)discover that a business needs healthy margins

Startups need growth on the back of reliable revenue streams to post stronger margins. The term RevOps currently trends higher in web searches, conversations and online references.

Internet trend number of RevOps

For example, related terms are sales support, advertisement spending or customer data platform. A combination of these trends confirm that some founders search how to generate more revenues with their existing clients. They currently think to develop more structured go-to-market strategies.

Even in a recession, sales teams need to leave behind brochures at client meetings. Or pay articles in industry mediums for market positionning. They continue to analyse their whole client portfolio and all existing channels. Rational decision-makers always chase profitable advertising wherever it exists. And will replace one non-performing service with a performing one.

Startups must aggressively streamline sales

Founders should focus on their team and their clients during the funding winter. Only startups with an urgent need for capital should raise funds. Everybody else should work on generating more robust and stronger revenues. So that their margins increase in the future. A startup is more valuable on improved fundamentals.

To keep it simple, tech entrepreneurs should not cut these teams — and invest in them wherever and whenever they can

  • IT — it’s not natural for founders to shoot themselves in the foot! They need techies and scientists to build and maintain great products or services.
  • Operations — Sales, Marketing, Customer Service, Partnerships. This is where founders can improve their topline thanks to using RevOps for example.

Depending on their startup stage, founders think about slashing Human Resources or Finance. But, management teams and revenue makers need (all) the support from these functions. Someone in the team needs to efficiently:

  • collect monies due to the business
  • manage the treasury
  • nurture relationships with suppliers and partners
  • keep employees performing well (and happy) to have low or no operational errors
  • do much more in lean times

No need to be the next moonshot project

Nobody knows for sure when startups will operate again in improved economic conditions. Or how long it will take venture capital to normalize. These are hard questions to answer with certainty. Yet, the answer to our initial question above is not as daring or impossible as a moon landing.

Lego Moon landing module with two Lego Astronauts having planted a Lego Stripes & Banner on a moon coloured carpet

Founders must invest their energy and resources in their product, team and clients. And wait for better times down the road. Their current investors will thank them. And the next ones will see more attractive businesses to invest in — or even acquire.

Footnotes:

  1. Actual and planned layoffs for October/November 2022: Twitter (50% of its staff), Cameo (25%), Robinhood (23%), Intel (20%), Snapchat (20%), Coinbase (18%), Opendoor (18%), Meta (14%), Stripe (14%), Lyft (13%), Shopify (10%), Apple (Hiring Freeze), Amazon (Hiring Freeze)
  2. As read and combined from websites of a shortlist of RevOps solutions existing out there such as baremetrics.com, boostup.ai, chartmogul.com, clari.com, hubspot.com, people.ai, profitwell.com, revpartners.io, salesdirector.ai, troops.ai

Photo Credits (by order of appearance):
Adrian Mag on Unsplash, Exploding Trends, Winston Chen on Unsplash

Information Sources:
Crunchbase, Dealroom, Financial Times, Pitchbook, Quartz, TechCrunch, The Kobeissi Letter

If you have read so far, thank you for your time! We are PCA Ventures Partners. If you like what you just read then let us know. If you do not like what you just read then also get in touch.

We got inspired to write this article by watching the TV Series WeCrashed starring Anne Hathaway and Jared Leto, The Dropout starring Amanda Seyfried and Naveen Andrews, Super Pumped starring Kyle Chandler and Joseph Gordon-Levitt, all in the last few weeks. These shows all came out this year and to us, it was a strong enough signal to dive in this topic.

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