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The Smarter Startup

The Economic Outlook for Startups in 2024

There are good reasons to be optimistic heading into 2024. Startup founders are advised to remain patient, listen closely to the market, and stay on top of tax obligations.

I recently interviewed Steven Lord, Managing Director of Burkland’s Service Delivery teams, and Ardy Esmaeili, Managing Director of our Tax Practice, for a discussion about the economic outlook for startups in 2024 and what founders might expect around fundraising from the year ahead. You can listen to the full conversation from our Startup Success podcast here: Beyond the Headlines: What Founders Need to Know About 2024’s Economic Outlook.

The Macroeconomic Situation in 2024

Our discussion started with Steve providing an overview of the current macroeconomic situation. 2023 was a strange year and a difficult one for many startups due to higher interest rates and a sharp drop in funding and liquidity. However, Steve pointed out that, by the numbers, it wasn’t a particularly bad year for the overall economy. Leading indicators like employment and wage growth improved and higher interest rates have been effective at cooling inflation. While Steve didn’t go so far as predicting rate cuts in 2024 yet, he stated that he doesn’t expect further increases this year.

Leading indicators like employment and wage growth improved and higher interest rates have been effective at cooling inflation.

Of course 2024 is also an election year, which usually has a positive material effect on the economy. The best years for the stock market are typically the third and fourth years in an election cycle. Still, Steve cautioned that this year could be a little unique, given the long period of ultra-low interest rates and high liquidity that we’re still coming off of.

Steve shared more details and insights on these topics in his recent post, 2024 Predictions for Startups to Plan and Prepare for Now.

2024 Tax Changes

Next our discussion moved to Ardy providing important tax updates for startups for 2024. As always, tax compliance is huge, including the usual tax preparation checkboxes like filing on time to avoid penalties and interest.

Going into 2024, Ardy emphasized the R&D tax credit and the need for careful attention to R&D expense capitalization and profitability. Per the Tax Cuts & Jobs Act (TCJA) of 2017, R&D tax credit claims must now be amortized over five years for domestic claims and fifteen years for international claims. This change has significant implications for startups that are claiming R&D tax credits.

R&D tax credit claims must now be amortized over five years for domestic claims and fifteen years for international claims.

Sales tax liability is another major issue. More states have started to impose sales tax on SaaS, digital goods, and software, and we’ve seen more audits around these things. State sales tax liability is determined by nexus—physical and economic—and every business is responsible for knowing where they’ve established nexus and paying the related sales taxes. Ardy notes that it’s more important than ever for startups to work with experienced tax professionals to avoid expensive mistakes. Startup tax experts like Ardy and his team can also help to implement systems for accurate automated sales tax remittance to streamline the process going forward. Ardy and Steve both emphasized the importance of accurate sales tax calculation and remittance when it comes to due diligence, with Steve noting “If you don’t worry about sales tax now, you will worry about it later”.

If you don’t worry about sales tax now, you will worry about it later.

Finally, we discussed important new requirements stemming from the Corporate Transparency Act (CTA). Beginning in 2024 all businesses must file annual reporting, and there are significant penalties for failing to report or reporting incorrectly. Ardy recommends that startup founders talk to their tax professionals and legal advisors to ensure that these annual filings are prepared accurately and submitted on time.

Beginning in 2024 all businesses must file annual reporting, and there are significant penalties for failing to report or reporting incorrectly.

Startup Funding in 2024

For the final part of our podcast interview, we came back to Steve for a topic that’s big on every startup founder’s mind right now, fundraising. 2023 was an extremely difficult year for venture funding, and a lot of startups are trying to get an idea what to expect in 2024. Steven emphasized the cyclical nature of venture capital and its close connection with interest rates. Specifically, there is a close negative correlation between interest rates and VC activity. Interest rates go up, VC investment goes down, and vice versa.

Interest rates go up, VC investment goes down, and vice versa.

Steve went on to note that venture capital is an early cyclical cycle, turning before other sectors. VC funding numbers drop early, before many other mainstream economic indicators start to drop, and they rebound before other sectors rebound. Steve advises founders to begin preparing for a much more favorable fundraising environment, particularly in the second half of 2024, noting “We’re much closer to the end of this downcycle in venture financing than we are to the beginning”.

We’re much closer to the end of this downcycle in venture financing than we are to the beginning.

Of course this doesn’t mean the VC landscape will return to exactly where it was a couple of years ago when we were dealing with an excess of exuberance and liquidity. We should, however, start to see a normalization of the trend and an upswing in venture activity. Steve offered some valuable parting advice for early-stage founders, which is to raise only what you need to right now, as valuations are likely to increase later this year.

Raise only what you need to right now, as valuations are likely to increase later this year.

It was encouraging to hear Steve’s predictions for the year ahead. The past couple of years have been challenging for startups, but the market seems to be normalizing, things are trending in the right direction, and there are good reasons to be optimistic heading into 2024.

Thanks to Steve and Ardy for joining me on Startup Success to share your predictions, insights, and advice for the new year.

Listen to the full episode here.