Over the past few months, the team at Two Sigma Ventures has been conducting a listening tour among many of our portfolio companies, to learn what we don’t know and better understand what’s happening on the ground as the economy is changing.
As founders are increasingly determined to stretch cash and become “default alive,” we set out to uncover how this is impacting various dimensions of their decision making and leadership strategies, and how their views of the future for their companies are being changed by a looming economic downturn.
If 2022 was spent playing defense–shoring up the balance sheet and cash flow statement, keeping the right employees on the bus, and ensuring their products are mission critical–are there opportunities to shift to playing offense in 2023? Highlights from speaking with our founders, below:
8 insights into the macro-environment through the lens of our founders
- Extended Enterprise Sales Cycles: Sales cycles are lengthening as enterprise budgets are tightening, and it is increasingly difficult to predict pipeline. If it used to take three months, now it might take six months to land a customer. When customers do land, they are increasingly wary of signing large contracts up-front. Founders must be increasingly savvy about offering customers flexibility, and must prepare themselves to weather these extended sales cycles.
- Cuts to SaaS spending: As founders seek to cut costs and extend runway, one area taking a notable hit is SaaS spend. As James McDermott, Founder & CEO of Lytics, articulated, “This is where the rubber meets the road on if you are offering mission critical software that adds real value by saving money or growing revenue.” Many of our founders speak to the importance of doing what you can to ensure your product is mission critical for customers–and if it’s not, to make changes fast.
- Building with Less Competition: Some of our companies see the current economic environment as an opportunity for even deeper heads-down building. Michel Dahdah, Co-Founder of C3, says, “We will see fewer copycats due to the bad economy, which helps us take more time with our most important product features. We see this as two years of building with less competition.”
- Changing Founder-VC Dynamics: Speaking to the evolving fundraising landscape, Krenar Komoni, Founder & CEO of Tive, shares how “VCs are now focused on businesses that have efficiency rooted in their DNA and if you are not building your company with productivity and efficiency in mind, then you as a founder will continue to name the price and VCs will continue to name the terms.”
- Capital Markets Will Continue to be Competitive: For most companies, fundraising will be increasingly difficult. However, a subset of companies’ stories or metrics seem to be so strong it doesn’t really feel like the environment has changed much for them. Their rounds are still big, valuations are still aggressive, and the speed of rounds is still fast. Austin King, Co-Founder & CEO of Rift Finance, shares, “The bar is much higher now in order to attain follow-on funding. However, teams that have the demonstrated traction and market fit still have access to much larger capital markets than in previous bear markets.”
- Hiring Managers Have More Negotiating Power. Founders are hiring conservatively, and as such, hiring managers have more negotiating power. This is a key time for finding strong talent as well, in the wake of unfortunate layoffs creating more openings.
- Shift to Global Engineering Talent. Founders are adjusting to managing distributed teams, with many founders seeking global talent as a critical competitive advantage. As Tomer Molovinsky, Co-Founder & CEO of Per Diem says, “It is now possible to hire really good engineering talent in the developing world for pennies on the dollar. We see this as a big opportunity for early-stage startups as long as the CTO is comfortable managing remote workers.”
- Turning Challenges Into Opportunities: No one knows how long or deep a potential recession will be, and everyone must remain vigilant and retain important talent. But the best companies know that the time will come to shift to offense. And what differentiates the companies that stay alive and those that thrive, is the ability to turn this challenging period into an opportunity–from acquisitions, to hiring key talent and overcoming the competition.
If you’re a founder building a data science-enabled business, we want to hear from you: laurenx@twosigmaventures.com.
