The flurry of technological advancements and startups to match has left a lot of heads spinning and a lot of “industry professionals” in the dust. However, this rapid state of change seems to be far from evening out into a predictable marketplace. In fact, it’s beginning to look like many of the Silicon Valley powerhouses of today (Facebook, Juniper, Twitter, etc) may be the crash-and-burn stories of the post-tech-bubble-burst era that many economists say is coming our way. Who survives and who doesn’t in a market where overly-valued tech startups are finally brought to heel? A lot of that depends on adjustments that companies, especially young tech companies, make right now.
The business of starting a startup, after all, has changed a lot since its fledgling days. On one hand, new and cheap services like the Google Cloud, Slack, Shyp, and other digital helpers have enabled small businesses to manage their goods, services, and communications without breaking the bank. There’s also a huge number of venture capitalists that are actively seeking out startups to fund in their nascent stages.
“All of the growth in venture capital has been in the seed market,” explains Scott Kupor, a managing partner at Andreessen Horowitz. That said, just because it’s easy to start a business doesn’t mean it’s any easier to bring it to fruition. A startup can’t just focus on crafting its product; it has to immediately work on international rollout and acquiring new investments in order to find success in a global, borderless market with a tendency to enable winner-take-all monopolies.
“It’s true that it’s cheaper to start companies,” continues Kupor. “But it’s also true that companies that grow require a lot more capital to do so, and they require it earlier in their life cycles.”
It’s that kind of economic setting that has brought rise to what entrepreneurs call the “Series A crunch” or the “valley of death” between seed and growth funding.
“It’s become shockingly binary,” states Marco Zappacosta, CEO of Thumbtack. “Either you have product-market fit with great growth and you’re in the club and you can raise all the dollars you want, or you don’t and can’t raise any.”
Jeff Grabow of Ernst & Young’s Americas believes that this dynamic will foster a pullback of private funding in the tech-bubble-burst future: “If that scenario player out, I think it would affect people in the midrange the most.”
In other words, companies that hope to make it in the current startup environment have to find a way over the Valley of Death and into what generally becomes an abundance of growth funding. Successful companies must be able to show investors fast growth in customer acquisition and general success, and that can mean that companies must launch successful ad campaigns and manage to get a lot of pioneer customers. The imbalance is this: the attributes that enable a company to pass through the Valley of Death aren’t necessarily the attributes that will enable a company to survive once the tech bubble bursts. It’s these companies that can pass the first, but not the second test of survival that are expected to hemorrhage money and become vessels of the upcoming economic downturn.