Over the last several months, funding rounds for startups have dropped about 50%. With a recession looming ahead and rising inflation, venture capitalists are much more conservative with their investments. Unlike a year ago when capital was easy to find, today’s startups must negotiate a much more challenging landscape. Instead of going about business as usual, a lean growth strategy must be adopted. Failure to consider such a shift could result in a company’s demise. But for those lean startups with strong value propositions, the future is likely to look quite bright.
Many companies engaged in a lean growth strategy have already made major changes in their approach. Some actually got ahead of the curve and acquired capital several months in advance. Others, however, are actively changing their spending habits and investing only in the bare essentials. Interestingly, these shifts among lean startups are affecting labor and talent markets. And they’re refocusing company priorities away from growth and toward efficiency. Fortunately, several excellent strategies can be considered in this regard. That’s especially for those companies looking to weather the anticipated capital drought to come.
“Bear markets call for prudent measures for running any startup. While these are challenging times, not only owing to a funding crunch but also inflation and a squeeze on the supply chain, it would help startups build lean operations to achieve better unit economics for products they’re building.” – Neha Khanna, Director, ValPro Management Consulting
Lean Growth Trends Already in Place
In terms of reduced capital funding opportunities, the writing has been on the wall for several months. Even seasoned veterans like Elon Musk appreciate the importance of cutting back. Likewise, most analysts expect inflationary trends and capital constraints to last at least 18 months. Unfortunately, roughly 30% of all startups today barely have enough cash to make it this long. And for new startups, access to investment funding is even more difficult. As VC firms become more cautious, they are choosing to fund companies that are better established. Likewise, businesses identified as lean startups are gaining more attention. As a result, many have already been forced to adopt lean growth strategies.
Lean startups currently are those that are shifting their mindset away from expansion and growth. Instead, the focus is identifying core activities that are essential to their long-term success. Activities and products that add value and generate profits are taking priority over performance areas. And naturally, unnecessary expenditures are being eliminated, including hires that may not be essential. These changes represent key lean growth techniques that could make the difference between survival and collapse. And it’s also the ones that VC firms find the most attractive currently.
“We are big believers that downturns lead to great opportunities. The reason this is an exciting time is first there is a lot of human capital that’s been unlocked from companies. Second, when capital is not abundant, you build with far greater discipline.” – Hemant Taneja, Managing Partner, General Catalyst Digital Health
Lean Startups and Talent Markets
For more than a year, the demand for talent has far outpaced its supply in numerous industries. This is especially true for tech companies and those in need of business and data analysts. But as lean startups have emerged, something interesting is happening. As they cut staff down to the bare bones, opportunities for locating top talent are increasing. Prior to recent economic shifts, startups were invested heavily in talent recruitment. In fact, more than half of all startups used funding to primarily recruit talent needed to expand. But now, lean startups are reversing course. Based on recent surveys, over 60% have either significantly cut or ceased all hiring efforts. This is why talent supply and demand curves are shifting.
Lean startups today are attempting to reduce human resources needs as much as possible. Already, more than a fifth of those employed with startups have been laid off in recent months. Of course, startups must still invest in growth, even if it’s in quality, value and profitability. Therefore, the lean growth approach attempts to secure an “all-star team” that can achieve core goals. However, it has to be also recognized that these trends are making some of the best talent available for hire. Thus, depending on a startup’s situation, this might be an ideal time to find that missing piece of the puzzle. Naturally, this might not be feasible for early startups, which are much more concerned about significantly extending their runaway.
“I’m so excited for some of these companies who have been growing profitably to go thrive and survive. What I learned at a company, where it’s forged in the first dot-com crash, in a recession, is that you have to be scrappy and you have to be profitable.” – Wesley Chan, Managing Partner, FPV Ventures
Lean Strategies to Consider
The goal currently now for lean startups is to preserve cash, add value, and demonstrate sustainable profits. These will be qualities that will attract what little VC funding is available. In an effort to do this, lean growth strategies naturally involve eliminating waste and activities that add little value. That’s why most lean growth strategies are cutting back on marketing and non-essential talent. Similarly, most lean startups are embracing a back-to-basics model that reevaluates company processes and activities. Though difficult, these efforts will be valuable for any company in their pursuit of sustainability. And they invite the chance to introduce creative and innovative strategies that may not have otherwise been considered.
With that in mind, lean startups can benefit from a number of services outside their immediate company domain. For example, lean growth efforts may choose to outsource some key activities rather than hiring new personnel. Analytics and office support services may also be acquired at a much lower cost. These are the types of business services that could make perfect sense in today’s economic climate. Regardless, adopting a lean mentality for the coming months ahead will be critical for many startup companies. Navigating the road ahead will not just be necessary but will likely offer some valuable lessons for a brighter future.