If startups haven’t done so already, Cliff Holekamp, co-founder and general partner of St. Louis venture capital firm Cultivation Capital, says it’s time for them to meet and talk about what signs of an impending economic downturn means for their business.
“Every company should have a board meeting to talk about whether changing conditions will change their operating strategy,” Holekamp said. “For a lot of companies, it might.”
Holekamp’s suggestion comes as concerns signs are emerging about a slowdown in the momentum of the startup economy. Those concerns come amid a downturn in the public markets, a decrease in startup exits and venture capital raised in the first quarter of the year and dozens of venture-backed startups across the country beginning to announce major layoffs.
Prominent Silicon Valley investors are issuing warnings to their companies, with startup accelerator Y Combinator telling its portfolio startups to “plan for the worst” and Sequoia Capital giving advice to its companies on how to “avoid the death spiral,” according to Bay Area Inno, a sister publication of St. Louis Inno.
“There’s no doubt that the sands are shifting underneath our feet and the inflated valuation and hyper-activity market of the Covid era is coming to a conclusion, which is probably a healthy thing for the overall entrepreneurial economy,” Holekamp said.
At Clayton-based Lewis & Clark Ventures, General Partner Brian Hopcraft said that, given rising interest rates and inflation, the firm would see more “acute signs of a downturn” among its portfolio companies.
“Yet our portfolio companies have not seen reduced spending from their customers. We are expecting to see signs of this soon,” he said. "The question is how significant will this be? Nobody knows.”
A NEW EXPERIENCE
As uncertainty hangs over the technology and startup landscape, Hopcraft said Lewis & Clark Ventures is giving advice to its entrepreneurs about how to lead and manage their companies during an economic downturn. Most of the startup leaders, Hopcraft said, haven’t encountered a down market other than at the outset of the Covid-19 pandemic in Spring 2020.
“This is all new to them. Our advice is around right sizing your growth ambitions, spending, and hiring. The ‘grow at all costs’ era is gone,” Hopcraft said.
As startups seek out fresh funding, Holekamp said he expects companies with strong performance metrics will continue to be able to reel in investment dollars at attractive company valuations. Startups in the middle, situated between the high achievers and low performing firm, likely will be impacted the most by lower valuations and tighter purse strings, he said.
“I think the hardest part is the honest appraisal of where you fall in comparison to other companies that are seeking capital and how competitive you are. It can be difficult to do a self-analysis without bias,” Holekamp said.
As companies seek to understand their positioning in the current market, Holekamp suggested they reach out to venture capitalists to ask what performance and financial metrics they are seeking for investments.
“That happens very rarely. We rarely get early stage entrepreneurs contacting later stage funds and asking what kinds of metrics do you want to see that would make us an attractive investment. We don’t often get asked that question and we’re happy to answer it,” he said.
While tougher economic conditions may be ahead for local startups, Hopcraft contends the ripple effects of a downturn could be less severe locally.
“The Midwest ethos of growing your company responsibly by not overspending, and by focusing on your customers results in more fundamentally sound businesses. Of course a downturn will be tough, but I would assert the Midwest companies are better positioned to manage this vs the coastal startups,” he said.
