President and CEO of Rev1 Ventures. Tom Walker is focused on helping entrepreneurs innovate and succeed.
These are extraordinary times for entrepreneurs. While it is never easy to start and scale a company, the pace of the challenges of the past two-plus years feels relentless. Seemingly hypothetical scenarios from business school case studies are hammering real-world startups from coast to coast.
A global pandemic, supply chain disruption and talent wars, inflation and the rising cost of capital, culture shifts and geopolitical disruption—today’s choppy economic and social waters are test-by-fire for young companies and even established corporations. If ever there was a time to put business school “what ifs” into action, that time is now.
Dollars, Dimes And Due Diligence
The demand for goods and services that was tamped down by the pandemic has exploded, driving up the cost of seemingly everything, ranging from haircuts to housing and steel to silicon chips. Shipping and transportation prices are impacting virtually every industry. The domestic inflation rate topped 8% in May. The effect has reached venture capital.
Even though 2021 was a record year for venture investment, with venture funding nearly doubling from 2020 to 2021 and a reported 607 active unicorns in the U.S. (75 of which have debuted since the first of the year), the winds have shifted. Global venture capital is still up year over year; however, first-quarter VC funding fell 13% from the fourth quarter of 2021.
It is time for entrepreneurs to recalibrate. Investors aren’t turning away from your asset class, but it will likely take longer than it has to close rounds. Uncertainty in virtually every market makes investors nervous. Expect venture capitalists to demand deeper due diligence at every stage. Previously “committed” investors might change their minds. Certain LLCs might move to the sidelines for a while. Crossover investors, such as hedge funds, might redirect toward stock “bargains.” I also don’t expect a foam of IPOs in a market like this.
I believe it is more important than ever for young companies to preserve cash. Return to the basics. For example, you can consider holding fixed costs to an absolute minimum and treating variable costs like you are spending your own money, which you are. You might also consider delaying capital purchases, leasing instead of buying and renegotiating fees and terms with providers. The proliferation of Zoom over travel, plus the shift to remote or hybrid work environments, are ideal tools for young companies to manage fixed and variable costs. In this economic environment, setting the base of financially sound practices will serve the company for years.
Talent: A Startup’s Most Crucial Asset
At my company, we are coaching our portfolio companies that it is more important than ever to build out and execute their talent strategies earlier in the current competitive talent environment. Whether customers are happy or not, whether industry sectors are boom or bust, or whether the market for talent is tipped toward the employer or employee, people are always a startup’s secret sauce.
A decade of workplace change has been compressed into a matter of months. Young companies don’t have decades of business practices to rework. Founders and startup hiring managers have a generational opportunity to develop new ideas that take clever advantage of the many ways organizations and management practices have changed. They can start from the default of remote-first or hybrid work. They can look at the entire world as their source of talent. Geographic disadvantages (and advantages) are going away. Instead of overcoming cost-of-living or a shortage of engineers, startups can focus on building cultures that support cohesive and connected teams no matter where the employees work.
Generation Z is a talent powerhouse. These self-sufficient digital natives are realistic and value financial security. Invest in technology to support online collaboration. Multiply the impact with a cadence of strategic in-person meetings. Additionally, keep in mind that Generation Z is the most racially diverse generation yet. As such, aggressively recruit in underserved communities. Use internships to draw Gen Z into your talent pipeline while they are still in school.
While making inroads with Gen Z, don’t ignore other cohorts. Scout nontraditional sources for talent—organizations that train people for a new field. For example, in Columbus, where my company is located, there is a coding boot camp that finds, trains and sets up people of color at companies ready to innovate at a grander scale.
Putting Business School Hypotheticals Into Action
There is no way to learn about how inherently risky entrepreneurial businesses are until you become an entrepreneur. No matter how ideally a solution solves a big problem for a customer, market validation will call for pivots. Startups seldom complete product development ahead of plan in the most successful prototypes. It always takes longer to close a deal than any founder expects. Some risks can be managed; other risks are beyond our control. Savvy entrepreneurs anticipate and plan for both.