Unicorns Versus Cockroaches

Nick Martin
Nov 14, 2022

Globally, startup funding has been drying up amidst a maelstrom of economic and geopolitical crises. Venture funding has dropped by over a third, to the lowest levels since the second wave of the pandemic. Layoffs are taking place at a rapid pace, across every sector and specialisation of tech.

While blue sky thinking kickstarted a generation of optimistic startups, the time has come for a more resilient entrepreneur to scout out opportunities from the ruins of a couple of tempestuous years.

The era of unicorns returns to reality

The last decade of technology was marked by a cycle that elevated big numbers and fundraises. Unicorns with huge rounds captured the headlines, and further venture capital attention. Raising became, itself, a business goal.

Unfortunately, this era of low interest rates kept the cost of capital cheap and stoked a culture of excess and extreme liquidity, with private equity and venture capital funds taking the lead in looking for returns on investments. This led to too many startups raising at arguably inflated valuations; creating the perfect conditions for a crash.

Many founders, backed by their funders, pursued a strategy of spending to acquire customers to find product-market fit, instead of finding their fit first and using venture capital to grow. One founder recently admitted that their US$12,000 of monthly spending on social ads was generating US$7,000 of revenue. Minus other costs, they've been making less than 50 cents on the dollar. Just as the battle of the ride-hailing apps has shown, customers who are attracted by discounts generally do not remain loyal once the incentives end.

While this aggressive approach to effectively buying customers worked in the early days of software eating the world, times have changed. A startup without product-market fit is little more than an idea. No longer are big headline numbers enough to stoke a startup's ascent - funders and customers alike are looking for something with more substance to see them through the slowdown.

Diamonds in the downturn

While we may be entering a new era of more conservative funding rounds, this does not need to be the death knell for innovation. The traditional method of building a business from scratch, with scaling dependent on organic product-market fit and customer acquisition, remains. While a minimum viable product approach lacks some of the sexy sheen of a big launch, it provides a critical training ground to acquire customer insights, and adapt to them.

This slower, almost more artisan approach to business development has plenty of strengths. A reliance on customer cash means you have to be reactive, and ready to adapt. In uncertain times, this is a strength to tap into. While the looming global downturn may shrink resources temporarily, there still remain plenty of unsolved problems that are looking for solutions. There are, arguably, still rubies in the rubble of a crumbling economy - there for the taking.

Crashproof construction

While the playing field is certainly not even, now marks a great time to build a startup. The marketplace is flooded with experienced talent, who have now been through cycles of building from zero to one. There is less competition, yet services and products remain in demand as businesses and consumers continue to contend with a rapidly-changing landscape.

The key to building lasting startups in the current climate is to build strong foundations. These are made up of two key mission critical drivers that will get any technology off the ground. The first is prototyping. Startups need to build, get feedback, iterate, and repeat. Prototyping is imperative to improve your product and understand your market's priorities and needs - learnings that extend beyond the launch phase.

The second driver is simplicity. Simplify your product until you think it's as simple as possible - then simplify it more. This makes it easier to iterate your prototypes or pivot your offering and when you're keeping your tech architecture simple too, you're keeping your operational costs low as well.

While budgets might be cutting back, there remain strategic plays at growth goals. For example, industry-wide hiring freezes may mean there is more talent open to flexible opportunities. Large enterprise platforms that lack key tools or offerings for clients may see their foothold in the market loosened as small startups start to develop solutions for increasingly specific needs. We may be looking at a nuclear winter - but that does not need to mean oblivion.

The age of the cockroaches are here

They aren't sexy - but they survive. Cockroaches are scrappy; doing everything they can to stay alive. The current funding landscape calls for this kind of grit and determination.

To survive this uncertain future, startups would do well to take a step back to basics. Prioritise low cost entry points that get you closer to faster revenue over the shiny platforms and look to sustainable business models that are anchored in more realistic unit economics.

It's an old but gold piece of advice, but keep it simple. Complex systems and shiny tech may be exciting, but the technology ecosystem has some pretty huge gaps in its boring but necessary foundations. Taking a slower approach to prototyping, connecting with customers and iterating based on feedback may not be slick and cool, but it paves the way for a stickier product that has greater scope to scale when conditions are right.

This downturn may be dramatic - but it could be the opportunity to shift from an overly consuming hype cycle to a more intentional way of building and developing our products and ecosystems. After all, cockroaches don't survive alone - they live in colonies.

This article was first published in The Business Times.

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