2021 was a boom year for tech startups. The extended impact of COVID created opportunities to bridge the gaps from the disruption of everyday life through lockdowns and a need to limit contact with individuals outside of households. This was exacerbated by federal initiatives to provide financial relief for people who didn’t feel safe leaving their homes. Investors were eager to fund companies with new and innovative technologies and software, particularly those that digitized or virtualized formerly in-person interactions. Interest rates were low and investors were less concerned with short-term profits and liquidity, anticipating significant returns to come.
Is Inflation Impacting Startups?
That situation changed in 2022. According to the U.S. Bureau of Labor Statistics, inflation has risen 8.6 percent from May 2021 to May 2022. The economy began to overheat from continuing high demand from consumers with money to spend and fewer individuals willing to go back to work. Many feared exposure to COVID and or felt a lack of need due to financial relief by federal initiative. In addition, the availability of goods fell due to logistic challenges across the world as locations routinely opened and closed due to COVID lockdowns. This level of inflation represented the highest increase since 1981. In response, the Fed has started raising interest rates and a potential recession is now on the horizon.
As inflation increased and the potential of a recession looms, consumers began to notice the impact on their buying power and decreased spending. The earlier perceived window of opportunity for investors began to close quickly.
Not surprisingly, investors have pulled back the reins on funding tech startups. Crunchbase notes that global venture funding sank to $39 billion in May 2022, the first month in a year when it was below $40 billion.
What happens now, particularly with interest rates rising and reduced market liquidity? If you’re running a tech startup, you need to adapt. Let’s look at a couple of the key parts of the business you need to check, to manage operations and drive top-line growth. Your operational and strategic savvy will be of primary interest to potential investors.
Re-assess your financial model
This model creates the financial forecasts and income statements investors want to see in your business plan. There are various off-the-shelf financial models to choose from — make sure yours explains the financial rationale for your business and the assumptions behind it.
Does your model produce financial statements for three years or more? Private equity and VC firms want to see at least three years of financial statements, plus a monthly income statement. They’ll also want to look closely at your cash flow and balance sheet. Make sure all statements are GAAP- and/or IFRS-compliant.
What kind of analysis capabilities does your financial model offer? Does it cover your key financial metrics, such as your break-even point and average inventory? You also need to break down costs for your profit and loss statement. These include revenue, cost of sales, selling, general & administrative expenses, marketing and advertising, R&D, interest expense, taxes and net income.
Your model should show costs by department — sales, marketing, engineering, product development and administration. You can compare these against your revenue modeling, dialing in the costs to acquire new customers. Can you define trial, recurring or seasonal offers? How does your pricing work (or fall short)? What does it cost to drive organic growth with existing customers, or replace or reactivate them? These are questions private equity and VC investors will assume you can answer.
Revisiting your financial model frequently is important. You need to assess progress toward your goals and determine if changes in the model’s underlying assumptions should be reassessed. If you last updated your model at the onset of COVID, the more recent impact from inflation and consumer spending habits should be sufficient reason to reevaluate this.
Reduce your operating costs or burn rate
As the outlook for available funding diminishes, a business needs to double down on making the most efficient use of those resources at hand. The availability of AI, back-office automation and cloud hosting can control your costs in various ways. Look at minimizing your administrative head count and get comfortable with your engineers, product developers and sales force working remotely. Instead of signing multi-year leases, look into co-working spaces. Book conference rooms for workshopping or significant meetings, but don’t let your overhead increase with office space that adds cost instead of value.
Re-prioritizing your spend for a more agile approach to accomplish your goals may require operating at a smaller scale. You can validate your plans, but with lower costs. Focus your spending on technology that makes your business grow. Make sure your IT investments increase transparency and collaboration and improve the customer experience with more engagement and better service. Every role in your operation should be able to demonstrate how they’re using precious financial resources and creating business value. You should be able to review this data at any time, to see if you need to reallocate spending.
Maximize ROI on your marketing budget
Marketing is one of the first departments to face the axe when times are tough. Cut if you must, but do it intelligently. Make sure you can still reach prospects and drive top-line growth. As Karen Cahn, Founder and CEO of IFundWomen, notes, “The best source of funding is revenue. Period, full stop.”
Startups have to think about marketing differently than companies in their second or third year of growth. Define your objectives and rely on a digital strategy that combines a website (a capitalized expense) with a robust presence on LinkedIn. Build a reputation for thought leadership by publishing articles that answer your prospects’ questions. Publish them on your site on a regular basis, to improve your search engine rankings. Share your content on LinkedIn and submit story pitches to industry journals. Build relationships with industry editors — they have content buckets to fill on a regular basis and need authoritative commentary. Make sure everyone at your company is on LinkedIn and shares content. This costs nothing and leverages your colleagues’ personal networks.
Offer to speak at tradeshows or participate in panel discussions. Raise your profile. Over time, you’ll be providing air support for a boots-on-the-ground business development campaign.
Find advisors to help raise capital and use it
You may be a gifted engineer or salesperson, but that doesn’t necessarily mean you know how to secure funding or run a business. Raising capital is particularly challenging for female entrepreneurs. According to Pitchbook, women secured only two percent of funds invested in VC-backed startups in the US in 2021.
Coaching makes a difference. Karen Cahn’s team at IFundWomen reports that female entrepreneurs who use their career coaching raise 27 times more funding than those who don’t.
How CPA Firms Help Startups
It’s also worth finding a CPA firm experienced in working with technology companies in every phase, from startup through growth mode to a successful exit. Windham Brannon can help you manage these challenges, whether you need support in raising capital or scaling up in years two and three. We can introduce you to suitable investors and make sure you take advantage of R&D tax credits.
To learn more, you can reach out to your Windham Brannon advisor or contact Patrick Terry. You can also find us at the Atlanta Tech Village, where we share business advice and guidance on common tech startup issues.
