2022 has been a year of ups and downs for businesses around the world. While the year may have started with a lingering boost from 2021, many founders are now facing challenging market conditions as the new year approaches.
Martin Lehmann, a Senior Associate at Verve Ventures, summed up the shift as the “hangover phase” after two years of rising valuations and easy access to capital.
“We are out of aspirin, so we will need to wait for the headache to wave off slowly."
How are founders preparing for this uncertain road ahead? And what can VCs do to support their portfolio? We asked these questions during the Founders Panel at Affinity’s inaugural Campfire conference in September 2022. Here are four key takeaways from the discussion:
Doubling down on existing business and increasing product stickiness
Macroeconomic pressures and a changing market will make companies more intentional about how they invest their time and money. With this in mind, 2023 will be the year that many founders commit themselves to strengthening their existing business.
“We’re going to focus on customer retention, investing in existing products to make them stickier, and tightening ICP,” said Maleka Momand, co-founder and CEO at Esper, a cloud-based policy management software for government.
Gleb Polyakov, co-founder and CEO of Nylas, a workflow integration software platform, also said he will focus on growing and scaling active operations.
“On my side, we have an 80% inbound SMB market. The other side of the business is top down enterprise sales, and you have to get very rigorous there,” Polyakov said. “That said, we’ll pull back R&D engineering bets that weren’t going to pay off and focus on existing business.”
Concentrating on existing product lines enables businesses to direct their resources to making improvements that better serve customer needs. Plus, a team that actively incorporates customer feedback into their development cycle has a higher chance of retaining those customers. Loyalty increases when customers feel their concerns are heard, understood, and valued.
Openly communicating with their teams
During times of market fluctuation, employees look to their leaders not just for company news, but for guidance on the economic climate and how it may impact their work. Being transparent and open with employees is an important way that leaders can manage team morale and accountability.
“Transparency ties directly to ownership,” said Christina Gilbert, co-founder and CEO of OneSchema, an embeddable spreadsheet importer and validator. “We have to come to [employees] and say ‘This is the reality of the situation, how can you own your function to help us reach our next milestone?’”
Transparency isn’t just about accountability and ownership. For Momand, it also helps with managing a team’s psychology: “We need to be transparent with our team about what happens if revenue hits X number,” she said.
This isn’t to say that employees should be viewed as cogs in the machine. On the contrary, both Gilbert and Momand are proponents of empathetic communication.
“Empathy is really important,” Gilbert said, adding that it was a difficult time for employees and leaders across the board. “Having conversations with them about what they’re seeing helps us see beyond our own limited window.”
Leading with transparency and empathy can help employees feel more secure during uncertain times. Beyond that, by enabling them to see how their work supports organizational goals, employees can be more effective in their roles and help move the company forward.
Listening and learning from those who have been here before
For many on our Founders Panel, this is the first time they’ve had to navigate such economic uncertainty. With limited experience handling a rapidly changing market, it can be tempting to panic and make knee-jerk reactive decisions that have ramifications down the road. As Momand said,
“Anytime you're operating out of a fear mindset, your decision-making capabilities are capped.”
Investors are a valuable resource at this time. Founders can turn to them for context on what else is going on in the market, and for what they’ve seen other companies do to navigate times of change.
“I’m a first-time founder, and our investors, who have seen economic downturns before, told me and my team about companies that were successful coming out of something like this and what they did to get through it,” Gilbert said.
By learning from experienced investors, founders can better understand how to adapt to a changing market. It also gives them the opportunity to adopt the best practices of companies that have been in a similar position and not just stayed afloat, but thrived.
Taking the time to find the right-fit investors for your next stage of growth
While founders will turn to their current investors for advice right now, it’s just as important to find the right investors for where the company is heading next. Amir Movafaghi, CEO of Mixpanel, a product analytics software company, shared two of his leading questions for potential investors:
- What are the key things we want to capture as we’re shifting our planning?
- What are the leading indicators we need to focus on so that the core messages don’t get lost?
Most of all, however, Movafaghi said that a potential future investor needs to understand the unique qualities of their solution.
“There’s a genuine interest in really wanting to know what we’re building, the problem we’re trying to solve, and [whether they] can help us,” he said, adding that the criteria for the right investor should go beyond optimizing for the term sheet. “We just genuinely want someone helpful, who has good ideas, and has convictions about their ideas and why they want to participate.”
Sometimes finding answers to these questions requires founders to pause on their next funding round. “We entered 2022 with a healthy amount of runway, and as the markets dipped, we decided not to raise a Series B now or even into 2023,” Momand said.
Finding the right investor can make or break a growing business. While it’s important to find an investor that will help your company grow, it’s equally important for that investor to really understand the product and its impact. It’s also crucial for founders to understand and be honest with themselves about where they are on their journey, and if they should take a step back from funding to re-focus their efforts on other parts of the business.
The consensus from our Founder Panel was that 2023 will be unpredictable. It was a similar story from the hundreds of top investors we surveyed for our annual Predictions Report. But we believe there is reason for optimism. Download the report to find out why—and for steps your firm can take to source high quality deals, support your portfolio companies, and stay ahead of the competition.