The tech market has taken a dive—alongside the rest of the economy—and there’s no telling when it will recover. After a second quarter of declining economic growth across the board, it’s clear we’re headed for a recession, which most economists are predicting will set in during early 2023.
The question remains for tech founders—what’s next? It’s evident this shift will not be kind to startups looking to raise capital, and those who plan to survive the downturn need to take immediate action to safeguard against the effects of a 2022 economic crash.
Heading into a Recession: 2022 Economic Crash
Growth in developed countries is expected to decelerate to nearly half of what it was last year, falling to 2.6% from 5.1%. We can clearly see the many factors that have contributed to this fall—a pandemic, followed by supply shortages, labor shortages, and finally the war between Ukraine and Russia increasing pressure on the supply chain. As a result, inflation has shot up to over 8%—ending May 2022—the highest annual increase since the 80’s.
This means that consumers’ real income has been lowered, and with it inevitably goes their appetite for products and services that are non-essential. Selling to a customer-base on a budget isn’t exactly the ideal climate for both emerging and well-established tech companies, whose stocks have plummeted over the past few months. Even “safe” stocks such as Google, Apple, and Microsoft have taken a blow, and it’s unclear whether we’ve hit the bottom yet.
The State of Venture Funding in 2022
Consumers aren’t the only ones holding onto their cash. Venture capital firms will hold back some funds and slow down investments, with funding expected to drop as much as 19% in Q2, according to CBinsights. This doesn’t mean deals aren’t taking place, but you can anticipate that less checks will be written, and it’ll take longer to fundraise than it has in the past.
While it may seem like all doom and gloom, in reality, tech is coming out of a long bull market where it was previously much easier for companies to secure funding. Billions of dollars have been invested into PropTech specifically over the past 2 years, and though that trend will slow down, it isn’t going anywhere. There’s still plenty you can do as a tech company founder despite the 2022 economic crash.
What The 2022 Economic Crash Means For Tech Companies
There are a few things to keep in mind over the coming months, particularly if you plan to raise capital. For one, your narrative should reflect the current climate. For example, as consumer demand shrinks in response to inflation, investors will be more cautious about investing in B2C companies. If you’re in the B2C space, you’ll need to get creative on how you can pull in a profit during a recession. Ignoring the elephant in the room isn’t going to help you win the respect of investors.
On the other hand, if you’re B2B and your product or service directly helps a B2C brand save money via connecting with their customers in a more cost effective way or streamlining processes so they can cut back on spending, you could be in a good position to solve a growing problem, and you should play on this strength in relation to the current market dynamics when pitching.
While funding will be more scarce in the coming months, the bigger picture is that this shift could be positive in the long term. Billions of dollars have been thrown at PropTech companies alone since the start of the pandemic, and while this boom in PropTech investment is exciting, some slow down could also be beneficial for the industry. Real estate is in desperate need of innovation, and more companies than ever are popping up to meet this demand—but that doesn’t mean every PropTech company deserves funding. I predict less companies will receive investments overall—across the entire tech industry, not just PropTech—and only the strongest candidates will receive backing. In short, a looming recession will help cut out the noise.
Advice for Founders Pre-Investment
- Buckle down and focus on staying alive versus growth. Growth will come when the conditions are right.
- Identify your main targets that will keep the business alive and move you to the next stage. Cut back spending in areas that aren’t necessary to hit those targets so you can extend your runway as much as possible.
- If you have successfully raised, don’t squander your funds, as another raise is not guaranteed.
Tips for Founders When Pitching
- Do your homework on funds before reaching out. Not everyone will be a good fit, and there’s an abundance of options. You could easily waste your time on firms that won’t invest in you if you don’t research first.
- Be crystal clear on your story and your current revenue or path to it. Nothing is worse than a pitch that’s vague, disorganized, and lacks direction. Your pitch is a reflection of you as a founder, and if it doesn’t demonstrate clarity on where the company is headed as well as your path to getting there, it’ll get passed over.
- Don’t ignore your competitors. Whether you bring them up or not, investors will know who they are. And if you’re proactive about establishing what differentiates you from them, you can control the narrative in your favor. If you fail to address this, investors will be left to piece it together themselves, and—admittedly—sometimes they do a bad job and get it wrong, which could work against you.
- Just like you shouldn’t ignore your competition, you’ll also want to be upfront about any potential weaknesses. No one is 100% perfect, and investors aren’t expecting perfection. They are, however, expecting founders to be self aware of potential problems and what they plan to do to solve them. In short, you want to lead with strengths, and then follow with proactively addressing problems with proposed solutions.
No matter what stage your company is in, as a founder, you should always be preparing for the next market shift, so you can best position your company for what lies ahead. If you’re unsure of whether a capital raise is right for your company, read my guide on bootstrapping versus venture capital to explore your options. Also reach out to me about venture capital if you or someone you know is building a PropTech company in need of funding.