It started with whispers in offices, during company happy hours, and in Zoom meetings. The startup success wave had been good — great, really — for tech ventures that raised record funding rounds at sky-high valuations. From HealthTech to WorkTech to FinTech, startups were solving some of the biggest challenges facing our post-pandemic world. It was fun to watch startups over the last two years. And it was even more fun to be part of one. VC funding was up 4% year-over-year in 2020, hitting a record $335 billion, only to be eclipsed in 2021 by the staggering number $643 billion.
Of course, it was a golden age for startups. Why wouldn’t it be?
Then tweets and thought pieces and white papers from global firms started to float around. How long could the good times last? Geopolitics, war, inflation, and talk of a looming recession changed the calculus over the last few weeks. Companies like Netflix, Loom, and Carvana announced big layoffs. Cuts reached some of the darlings of the Southeast’s late-stage startup scene as well. Funding press releases, which were published at a rate no one could keep up with just a few months ago, became more sparse.
While no one has a crystal ball with all the answers, economic uncertainty has everyone asking: What’s next for local startups? We talked to investors and ecosystem leaders to get a better sense of what is really happening on the ground and what teams are focused on now as they prepare for tomorrow.
Slightly counter to what national headlines are suggesting, local investors told Hypepotamus they are more optimistic when they think about how startups in the area will fare overall in the coming months. The main reason: The Southeast has a higher concentration of promising early-stage ventures.
“At the early stage, we’re a bit insulated from what’s happening in the later-stage markets,” Vasant Kamath, Partner at Tech Square Ventures, told Hypepotamus. “We take a longer-term view, so what happens now matters to us less than what is going to happen in the coming years. In the early stage, it is about focus. And so some of that is actually dialing out what’s happening around you in the outside world because that can be really distracting.”
Tech Square Ventures is still actively deploying capital, having most recently invested in Gridline and Saleo, two Atlanta-based startups.
“I think Atlanta is uniquely positioned because the ecosystem skews so early-stage,” said Jaisa Gooden, VP of startup banking at Silicon Valley Bank. “If there were a lot more companies looking for growth capital, they may have a harder time because valuations are becoming more conservative.”
Gooden told Hypepotamus that market changes will impact how long it takes to close deals in town, but that could ultimately benefit founders who are hyperfocused on solving a specific problem with their tech.
Startup founders themselves gave a bit more of a mixed reaction when we asked how they are feeling about building up a business and raising capital in this market.
One founder in the MarTech space, who asked not to be named for this article, said they’ve decided to hold off on fundraising until 2023 in hopes that conditions might be a bit more favorable than they are now. Another mentioned they worry that a more conservative approach to investing will keep potential founders from even getting their idea off the ground any time soon. Over the last few months, we’ve interviewed several local founders who moved up their fundraising timetables to capture new capital now instead of testing where the market might land later in the year.
Other founders see an opportunity to build now.
“Being early stage, we’re super excited about the environment right now. Bear markets challenge customers to re-evaluate their products and services, and there is a growing interest in learning how to invest in all kinds of different opportunities,” founder Graham Gintz said. “Being in Atlanta, we know that this is a “prove it first” town when it comes to raising capital. The downturn just keeps us focused on hitting our sales numbers and growing with cash flow instead of through VC dollars. Our team is hyped to grow with solid financial fundamentals that can support growth even if the market goes into deep decline.”
Up in the coastal North Carolina region, Jim Roberts is working with early-stage founders and “communicating to our entrepreneurs about the potential of an upcoming POSSIBLE recession and talking about getting additional capital now, valuation changes, and working to close sales now.”
Joey Womack, founder/CEO of the nonprofit Goodie Nation, is also spending his time preparing founders to ride out the potentially bumpy ride ahead.
As overall funding slows down, Womack said he is telling founders in the Goodie Nation network to contact their investors and mentors now to better understand their roadmap for the months ahead. For those founders without institutional investors, he suggests focusing on conserving cash, driving revenue, and “doubling down on what’s working, with perhaps a little less experimentation.”
Lessons learned from the pandemic, mainly how to conserve cash and operate without cross-country business trips, could come back into play as startups hunker down, Womack added.
Gooden also gave some tangible advice based on what she is seeing in the ecosystem. “I think [founders] should be prioritizing customer acquisition because being able to generate revenue and driving your company’s growth in that way in the early stage is honestly the best path,” she added. “And be open to capital outside venture capital.”
THE STARTUP SILVER LINING?
For A.T. Gimbel, Partner at Atlanta Ventures, this is a time for founders to return to the basics.
“We always go back to those core principles around why someone starts a business. And that’s because they’re solving a must-have, mission-critical problem for customers. And if you’re serving that niche for your customers, you’ll be fine. Things may take longer to grow. The valuations may not be exactly what you want at this point. But you’ll be able to weather the storm,” he told Hypepotamus.
He added that the “fundamentals of the business” will do more to attract investors now than most other metrics right now.
The startup and investing ecosystem is forged in up and down cycles. There will certainly be moments of stress, rebuilding, and uncertainty to come. But downturns have historically given way to industry-changing ventures and new household tech names.
And that creates an opportunity for local early-stage companies that are ready to dive in and tackle a new problem for customers or explore an emerging technology space. And that is something local ecosystem leaders are ready to see.
“We’re at an inflection moment,” Womack added. “Over the last year and a half we’ve seen the start of the next era of the web…and that opens up opportunities for new technologies and new ways of solving problems.”