The current economic climate of Skyrocketing inflation, geopolitical tensions and extreme market volatility are clear warning signs that a technology investment winter is, indeed, coming. Global venture capital (VC) firm Sequoia Capital is calling the current economic climate a "crucible moment" for many organisations, and South-East Asian (SEA) start-ups are not exempted from the approaching drought.
Despite VCs raising USD900 million in the region, rising interest rates and economic uncertainty are pushing SEA start-ups to fire hundreds of workers as they focus on profitability than growth. China Renaissance Holdings founder Bao Fan even shared that this season of stagnated progress is drying up investment opportunities, especially for first-timers, with VCs becoming more selective before providing capital.
However, all is not lost, as out of darkness, comes resilience. This has always been the case during periods of economic downturn, as the best start-ups emerge during crises. Surviving and thriving during a tech winter is entirely possible with smart budgeting, process optimisation and creative funding
Recently, We held a webinar in partnership with Sequoia Capital, sharing with 250 startup founders our knowledge on this topic, discussing how with the right measures, you can manoeuvre yourself to ride out this snowstorm.
In a recent poll by Aspire, 47% of business leaders believe that optimising one’s finances should be a priority during this economic downturn.
This is the time to reexamine your liquidity. Ensure you have enough cash funds should this downturn last long, otherwise known as a runway. Your runway refers to the number of months your company can comfortably operate before it runs out of money. For an early-stage start-up, calculating your runway is crucial to success.
You should aim to extend this runway as much as possible. An up-to-date, accurate financial model can tell you exactly how many months you have left, allowing you to make real-time decisions to cut corners. You can easily generate these models with a finance platform partner like Aspire, which helps you track company spend and be truly on top of your finances.
When funding is scarce, startups need to be extremely careful about expenses, both foreseen and unforeseen. You have to go beyond identifying the highest expenses and adopt realistic and rigorous budgets. Your budgets must be dynamic, evolving as needed to meet shifting market demands. Real-time visibility of your company spend means you and your teams will never spend beyond your limits, making sure you cover all expenses and forecast for the near future.
In helping clients optimise their finance infrastructure, we have found that organisations that understand investments’ short-term and long-term effects have effectively made them cost-effective in the long run.
Digital transformation is a perfect example. Globally, tech companies have reported up to 20% cost reductions and up to 15% revenue growth when digitally transforming their operations, showing that this investment’s benefits provide substantial long-term savings. Digital transformation reduces costs through:
In this climate, you can consider VC funding model alternatives. One option is revenue-based financing, a model for proven growth-stage start-ups. You can raise capital from a financier who claims a percentage of your future revenue. Trajectory-based financing takes this approach one step further, with capital firms using it to provide non-secured loans, guided by business trend predictions.
For start-ups without access to these models or looking for non-dilutive financing options, explore credit lines with low to no interest or maintenance fees. For example, Aspire Advance Card can boost your business with as much as 50% of your monthly revenue in credit, giving you financial flexibility without diluting your start-up ownership.
Many start-ups isolate cost reduction from its impact on the entire business, leading to obsessively nitpicking every last expense, no matter how small. This can generate negative results that offset any cost savings. A classic example is eliminating employee perks. While it can be a quick and easy choice to cut, the long-term impact diminishes employee morale and productivity.
While you should control employee expenses, consider the context before blindly initiating cost cuts. Look for higher total impact cost reductions. For instance, renegotiating a vendor contract may have less impact on expenses in the near term but can lead to greater long-term savings.
“The safe move is to plan for the worst. If the current situation is as bad as the last two economic downturns, the best way is to prepare to cut costs and extend your runway within the next 30 days. Your goal should be to get to Default Alive.” - Y Combinator
Investors will still be scouring the market for investment opportunities. However, instead of the traditional high growth model once sought after, investors will now look for more concrete markers of success:
Analytics: Volatile and uncertain markets will make investors risk averse about their choices, and therefore dive deeply into a company’s financial reports and performance. Any signs of high risk, including being highly leveraged, cyclical or speculative, will be a clear red flag.
Stability: In a volatile market, investors will prioritise long-term strategy and gains over series funding for rapid growth. Demonstrating stability through low debt, net-positive cash flow, stable employment for existing staff, and consistent revenue streams show potential investors that you are a viable opportunity.
Many start-ups will find their typical investment pools frozen solid during this tech winter, and external funding will be hard to come by. These downturns make it difficult to predict how long or short these winters will be. While minimising costs should be nothing new, it will be critical to adapt to a demanding business landscape while relying on robust cost optimisation and budgeting. Perhaps winter is not coming. Perhaps winter is already here, and we’d best be prepared to weather it. You need to act now before it’s too late.