New Year, New You! The start of the year is always a good time to sit down and revisit your goals and for any self-respecting entrepreneur, they should be doing the same for their business. As macro-economic uncertainty continues to emerge, it’s increasingly important for start-ups to set their new year’s resolution to navigate these turbulent times.

With the rising inflation and a downturn in the public markets, it is clear that the peak has passed, and the market is entering a slowdown which is trickling into private markets. Global venture funding has hit a three year low, reaching only USD74.5bn in Q3 2022. This is a -34% drop quarter-over-quarter and a -58% decline from the peak in Q4 2021.

To illustrate this further, around 537 private tech-enabled companies were valued at over USD1bn in 2021 but only 25 new unicorns were created in Q3 2022, the lowest since Q1 of 2020. The investors’ enthusiasm is fading away alongside the beginning of economic slowdown. In other words, valuations are coming back down to reality and investors/VCs are spending more time looking at business fundamentals and actual cashflows.

Value Creation vs Valuation

Valuation do not necessarily reflect value creation. In the recent years, founders have been primed to focus on vanity metrics at the expense of marginal unit economics so as to drive higher valuations for their next round. The actual discussion of value creation has seemingly been sidestepped as investors piled into the next HOT thing.

However, the clock has struck, signaling the end of the party. Now, it’s time for founders to take a step back and evaluate the plans that they need to take to create a resilient business that is able to weather any climate. Early-stage start-ups have to start balancing their attention between offence (growth, marketing, hiring) and defense (governance, compliance, cashflow management) to ensure that they can continue to grow and survive. It’s also time for investors to focus on margins, cashflows, and revenue generated by companies.

The Resolutions

The economic downturn has swayed the sentiment of investors and brought about a funding winter. VCs will be much more conservative and raising funds will be much more challenging in the coming period. Below are some of the resolutions that’s founders should consider for their business in this coming year.

Default Alive

Founders should aim to get to Default Alive as quickly as possible. Founders should plan for the worst and prepare to cut costs (if they haven’t already) – this includes additional projects, R&D, marketing, and other expenses, to extend their runway.

However, companies should not cut away from costs that would subsequently cheapen their customers’ experience. Founders that have sufficient runway and the ability should consider taking in more capital from investors even its of similar terms from the previous round.

Many competitors will unlikely plan well and only realize they have hit a wall when attempting to raise their next round. By simply staying alive, you could potentially seize additional market share.

Product-Market Fit

The business should be focusing on achieving product-market fit, especially if they are post-series A and expecting to raise another round. Raising any capital at post-series A stage without a validated product-market fit will be extra tough in this environment. Concentrate on the few key metrics that drive the revenue of the business. Forget about the vanity metrics.

Focus on the defense

Founders that have been initially concentrating on the offense (growth, marketing, hiring) should start turning their attention to defense such as governance, compliance, employee retention and customer relationship management. As they say, “What happens inside is reflected outside.” This is important to ensure the robustness of the company.

Engage, appreciate, and reward your best employees. Losing top talent at this crucial stage will have a very negative impact on the company and finding new talents is going to be costly. Similarly, retaining and growing your existing clients will also prove to be essential in this downturn. Maintaining a strong net-dollar retention rate will reflect the resilience and value creation of the business which are important to go default alive. Early-stage companies should learn to balance between offense and defense.

Conclusion

A downturn is usually a huge opportunity for companies to demonstrate that they can adapt and get ahead of their peers. Downturns and recessions are a natural part of business cycle. Companies will have to learn how to see this as an opportunity to stand out, rather than as a threat. Setting the new year’s resolutions might be the first step in navigating through this changing environment.