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Tough times can build strong startups: An Update from Republic
For the past decade, funding to private startups has soared. In 2019, U.S.-based venture capital investments reached $107 billion according to Statista data. That’s a big increase from just $22 billion in 2009.
Over recent years, private companies have raised huge rounds of funding to grow more quickly. Many founders and venture capital investors encouraged a “growth at all costs” mentality. Big losses were fine as long as there was big growth too.
Now, conditions are suddenly tougher in the business world. Many companies have slashed spending, and are focused on achieving profitability (or at least reducing their burn rate).
Some venture capitalists have cut back the pace of their investments. Global VC investment dropped approximately 17% in the first quarter, according to research by Crunchbase. The second quarter should see a larger drop.
But some investors are out there looking for great deals. Here’s a quote from noted angel investor Jason Calacanis about investing during crises.
“Fortunes are built during the down market and collected in the up market.”
Jason speaks from experience. He invested in Uber in 2009, in its first round of funding. He also invested in Thumbtack’s seed round in 2009, and a few other unicorns.
As you surely remember, 2009 was a rough year. Millions were devastated by the crash in home prices. And the world financial system seemed to be teetering on the edge.
But that chaotic time proved to be an amazing environment for startup investors. Here are a few more companies founded during the 2008-2009 recession.
• Credit Karma, 2008 (sold to Intuit for $7.1 billion)
• Whatsapp, 2009 (sold to Facebook for $19 billion)
• Slack, 2009 (IPO, ticker: WORK)
• Square, 2009 (IPO, ticker: SQ)
These are some of the best start investments in recent history. And because they took place during a recession, it’s likely that the investors got a more favorable valuation (price) than they would have during boom times.
And these examples are no fluke. In the aftermath of every big crisis, great companies were founded. Microsoft was founded in 1975, during a period of high inflation and slow growth (stagflation). Disney was founded in 1929 at the beginning of the Great Depression.
All these companies started during downturns, and they came out battle-hardened and efficient. They changed entire industries, and acquired market share while their competitors were weakened.
Vulnerable to disruption
Tough economic times often leave large incumbent companies vulnerable. Big businesses are often slow to react to crises. Many struggle with their large debt loads and bureaucracies. They often stop investing in their own business to conserve cash or pay off debt.
This gives nimble upstart competitors a rare opportunity to grab market share. Here’s how the Founder Institute put it in a recent article titled “Why a Recession is a Great Time to Launch a Startup”.
“Startups by nature are lean and agile organizations and as a result, they are much better poised than large businesses to navigate rapidly changing tides in the economy.
In contrast, large incumbents are often slow-moving behemoths, especially vulnerable during recessions. An agile startup team can exploit this period to identify the weaknesses in its larger entrenched competitors, and position themselves to maximize on any opportunities to deliver where competitors cannot.”
Lean and mean
During the rush of VC funding we saw from 2015-2019, a lot of startups spent money wildly.
WeWork is the classic example here. They threw huge corporate parties around the world, bought a private jet worth $60 million, and paid founder Adam Neumann roughly $450 million, according to an estimate by Bloomberg. All while WeWork lost billions of dollars with no apparent plan on how to get to profitability.
That era of reckless startup spending seems to be ending, at least for now. WeWork was a wakeup call, and then COVID-19 hit. Around the world, entrepreneurs are tightening their belts and focusing on their missions.
Economic downturns force companies to be disciplined and efficient. Spending is more carefully managed, and lean habits are instilled in the corporate culture. As spending is cut, growth may slow for some companies. But their survivability often rises.
A recession, if that’s what we’re in, is never fun. There will be companies who fail due to this unforeseeable COVID-19 crisis, and that’s truly unfortunate. But times like this have a way of sharpening everyone’s attention. Some companies will push forward and gain ground. New startups will be founded.
We don’t know how long the current crisis will last. Hopefully the world will be able to safely end the lockdowns and reopen soon, and it’ll be a speedy recovery. But no matter what happens, there will be opportunities to invest in promising startups.
Republic listed 7 new startup opportunities last week. We’re not slowing down. We will continue to list the best startups we can find.
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