Why now is a good time to invest in startups
Based on the latest VC-funding downturn and the overall economic situation, it is easy to believe that investing in startups could not be a good idea at the moment. Late-stage funding went down by 40% quarter over quarter. Early-stage funding is down 39% compared to last year. Seed stage funding has been impacted the least until now. It looks like there won’t be a quick V-shaped economic recovery like after Covid.
Of course, many investors hold back when the outlook is not great. At low stock prices, they might not be able to pull out money, and they want to keep the investment allocation across the different asset classes.
An opportunistic investor would think differently.
Steve Jobs summarized it during the 2008 financial crisis:
“What I told our company was that we were just going to invest our way through the downturn, [...]. And we were going to keep funding. In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over."
But that requires enough liquidity, which business angels or smaller companies might not have at the moment. This is where we see a great opportunity for service investing and service for equity. It is not just about money anymore, but time and expertise, which can be invested in startups and compensated during better times.
Whether you invest money or your services, here are four good reasons why now is a good time to support startup founders.
The world’s problems remain
Historically, downturns always provide opportunities for high returns in the long run. Economic downturns also make people aware of problems, which motivates them to create better solutions. And the problems don’t become less. This is a great time for innovations. Many successful companies emerged from crises, like Uber and Airbnb after 2008. Digital health received a push during Covid, and more and more climate tech companies are founded today than ever before. Also, new technologies like AI and Web3 still have huge potential.
Due to the reduced investment appetite, valuations have come down quite a lot. Even in the seed and early stages, valuations have been adjusted. The VC industry is creating its own market environment. One could argue that the high valuations were sort of self-made and artificially increased, all the way to IPOs. Maybe the correction is also self-made because there still is a lot of dry powder, however, investors and specifically Sequoia and Y Combinator nudged their startups to profitability, longer fundraising cycles and lower valuations. This leads to the next advantage, more resilient and profitable companies.
Resilient founders and profitable startups
Some recommendations that Sequoia, Y Combinator and others gave to the startups are naturally what bootstrapped founders deal with all the time. Bootstrapping means that a company is built organically from its own resources without external investors, and 99% of all companies are bootstrapped. Now scalable startups learn to become profitable faster and appreciate the value of cash more. The growth at-all-costs mindset seems to be less dominant, and founders become better at cash management and preserving liquidity.
More talent than ever is available
Even large corporates were forced to lay people off and reduce their costs to become more profitable or slow down growth. Hence there is more talent available, and when there are no jobs to get, they are more likely to join startups at reasonable and affordable salaries. In the past, it was almost impossible for bootstrapped companies to hire top developers who would earn much more at Google, Facebook and co. These people earned well in the past and could afford to work for less money, in turn for sweat equity.
Recessions don’t last forever, and this seems to be a great opportunity for startup investors. For business angels and service investors, the environment only got better with cash-minded and determined founders, lower valuations and more talents.
It is now up to you to grasp the opportunity.