Startups are saturated with information on how to best budget and forecast for the year ahead. Founders are asking questions, but they’re not asking all the questions. Negative supposition about where the economy is headed and how this will affect venture capital funding abounds. And there’s always a tendency in the startup community to believe the path we’re on right now will be the same path we’ll be on in the coming months.
It’s understandable that leaders tend to focus on the nearest next steps for their business — release the product, get the market to accept it, tweak it with what you learn to move faster, and sell x amount of the product next year. But macro trends often matter more than founders realize, because these are about the overall environment in which founders are operating. Specifically, a more favorable VC funding environment is coming even though most aren’t calling for it right now — financing is down because it’s a leading indicator versus a lagging one.
…macro trends often matter more than founders realize, because these are about the overall environment in which founders are operating.
Larger, broader issues on the horizon will always impact the ecosystem, so founders need to think about the world they’re going to be in versus the one they’re in today. Interest rate hikes in 2023 are working, albeit slowly — looking forward another year, we must think about how consumers will react to rates heading back down and ensure the forward planning process is wide enough to encompass even the macro trends we don’t see at the moment.
Look at it this way: a pilot may know how to fly, but it’s crucially important they understand the weather ahead in order to have a successful flight. The same is true for founders looking to successfully chart a course for 2024. Yes, there are unknown outcomes that will have an effect, such as the upcoming presidential election, but from a macro perspective, dreary startup skies are going to start looking sunnier next year. And there are steps you should (or shouldn’t be taking) right now to best position your business.
Critical venture capital funding considerations
In next year’s macro environment, one of the biggest determinants will be whether interest rates stay higher longer. For a startup seeking funding, this means what’s best at the moment may feel counterintuitive.
Despite prevailing predictions, we aren’t likely to go crashing into a recession.
Despite prevailing predictions, we aren’t likely to go crashing into a recession. With the Bureau of Economic Analysis releasing an advance estimate for gross domestic product (GDP) increasing at an annual rate of 4.9 percent in the third quarter, we’re seeing several positive indicators. There’s higher consumer spending, showing underlying economic strength, which bodes extremely well for startups — higher consumer spending tends to push through to other areas, as the U.S. is a very consumption-oriented economy.
Higher interest rates will have a dampening effect, but remember the core reasoning behind the hikes — get inflation under control. This is happening, and it’s good for startups. It means a period ahead in which the economy grows while rates remain high enough for founders to continue earning capital on their capital via prudent treasury management. For example, we have a client who will earn $1 million in 2023 based on treasury management alone, lengthening their runway for another three to six months.
Yet another macro perspective is that venture capital is cyclical. If we consider the number of deals or the value of dollars invested over a 30- or 40-year period, this looks like a sine wave, with peaks and valleys oriented toward interest rates. It leads increases in interest rates and larger cyclical trends.
…the VC ecosystem is already correcting, and the funding engine these startups rely on will be throttling forward.
We know the VC ecosystem cratered in 2023, with the number of financings dropping, which all feeds into the overall economic doom and gloom we’re hearing about today. But the VC ecosystem is already correcting, and the funding engine these startups rely on will be throttling forward.
Developments in the U.S. and wider world
Current monetary policy is keeping U.S. interest rates and the dollar high. However, both will be impacted by the unfolding geopolitical situation. Conflicts around the world underpin what’s happening, and this absolutely includes the upcoming U.S. election. These events are extremely destabilizing when it comes to macro trends. Market rates in treasury bonds could easily have another push upward, even while many strategists have prepared for the opposite to happen. This would exacerbate the pressures felt on the economy, and thus the startup ecosystem.
At the same time, U.S. presidential elections are typically good for equity markets. They’re good for bonds from a price perspective, but the 2024 election will be unlike anything we’ve never seen, and founders shouldn’t underestimate the size of the impact. It could be very volatile, or it could be very positive.
Presidents typically do everything possible to goose the economy to get reelected, and the most favorable economic year of an election cycle is historically the third year of an administration. So, though everyone thinks the economy is about to fall apart, the data (including Q3 GDP) says it’s not.
While there’s this pervasive general unease, remember it’s not as bad as it looks.
While there’s this pervasive general unease, remember it’s not as bad as it looks. The outcome of the election will be important for interest rates, investment into infrastructure, the artificial intelligence conversation, geopolitics, the dollar, etc. — these will all move higher or lower on everyone’s radar on the other side of the election. But in the meantime, keep in mind it is coming and will be a wild card in terms of volatility.
What does this all mean for startups?
Looking back through economic history, the best times to start companies are when there are big dislocations in macro cycles. Some of the most successful companies we have today were born out of the 2008 financial crisis. Or consider Amazon after the tech wreck of the early aughts. Despite a plummeting stock price, Bezos asked investors to be patient, knowing his business would track with the rise of internet access. These periods of great dislocation, including banks and geopolitical disruption, are actually very strong environments for startups.
Advice here again asks you to understand the weather into which you’re flying. Planning for 2024 requires founders to understand interest rates will likely remain high, global and domestic political events will continue to destabilize the broader market, and the economy will likely be stronger than it feels. Cyclically, the venture funding ecosystem will get easier from here, not harder.
Planning for 2024 requires founders to understand interest rates will likely remain high, global and domestic political events will continue to destabilize the broader market, and the economy will likely be stronger than it feels. Cyclically, the venture funding ecosystem will get easier from here, not harder.
So, founders must ask bigger questions. What strategic decisions do I make differently? How do these things impact my future situation? If I want to build a company, do I do it now, wait, or do it in another country?
Most of all, consider when to go look for that next capital raise. Are we in a favorable environment? Not yet, but it’s coming. If you need to raise money to survive in the short term to get to that better weather, consider a bridge. Don’t go out and try to bank the next few years of your startup now, because valuations are unfavorable for all but the best-positioned companies. Better, if you can do it, is to raise as little equity as you can now, and plan for a larger round in the second half of 2024.
Navigating the go-forward environment is more a function of what not to do — don’t over raise, don’t believe the sky is falling, don’t have all your company’s money in one bank (remember the lessons of Silicon Valley Bank), and above all, don’t position your company for the environment in which it finds itself today. Position it for the one it will be in next year.
It is incumbent on CEOs to infuse macro trends into their planning and not just wait for the sun to shine. Use the time to build longer-term trends into the mix, and deal with any baggage now — bloated cap table, excess personnel, product bugs, bad unit economics, etc. So, when the cycle shifts, you have a strong story to tell.