June 14, 2022 2 min read

 Small businesses have taken the brunt of the pandemic – retail and hospitality especially. But in adversity has thrived a cohort of plucky entrepreneurs who have either pivoted with innovative ideas (zoom wine tasting or pottery classes anyone?) or whose ideas found their moment (Mr Yum’s restaurant ordering QR codes) in pandemic lockdowns.

 
However, as the world emerges to face an economic downturn, soaring cost of living, and monetary policy normalisation’s impact on markets, this breed is going into ‘survival mode’.
 
Wired.com reports significant layoffs already happening in the startup sector. And it suggests that cash reserves are going to be key to survival in the economic rough times. The reality is that cash will be constrained not just because revenues may soften, or not reach projected levels. For those that have reached the thresholds necessary to be able to raise cash in public and private markets, funding rounds are going to be a lot more difficult. In a high inflation environment returns into the future are going to be much more heavily discounted than in the post-GFC epoch. Risk free rates are coming up to meet them. And investors get flighty and turn to ‘quality’ in a downturn.
 
The boom is over for the startups. What doesn’t kill them will make them stronger. As Wired.com notes, many of today’s household names - Uber, Airbnb, Square, Stripe, Facebook – came out of downturns. But other startups will likely be some of the first casualties; we are seeing some of that in the Australian market already with on-demand grocery services Send and Quicko collapsing. Australian fintech giants Afterpay and Zip, not long out of startup mode themselves, are struggling to make a profit and have seen their share prices fall off a cliff.
 
Dovetailed with this ‘real world’ impact is the knock on effect on the venture capitalists that made a profit facilitating their financing. The Wall Street Journal reports that companies like Tiger Global Management, who ploughed billions of dollars of investors’ funds into startups in recent years, are starting to see a slow down in activity and some of their ‘bets’ go bad. In the case of Tiger this is apparently two-fold, having doubled down on the tech sector in public listed companies alongside its venture capital investments. In early May The Financial Times reported estimations that Tiger Global had made losses of US$17bn during this year’s tech sell off.
 
The two recent official interest rate rises in Australia will flow through the whole structure of market pricing, making it more expensive and difficult for startups to raise capital. For founders that may mean they won’t get the valuations they were hoping for, and so may have to give up more of their company in exchange for the capital injection they need.
 
So whilst Australia is currently seeing a fall off across later stage venture, early stage founders shouldn’t need to worry  - not yet. Take the capital that you can, re-focus your sales and underlying economics and stay the course.


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