Venture Capital and Economic Trends: What Startups Need to Know for 2025

Intro 00:01
Welcome to Startup Success, the podcast for startup founders and investors. Here, you’ll find stories of success from others in the trenches as they work to scale some of the fastest growing startups in the world, stories that will help you in your own journey. Startup Success starts now.

Kate 00:18
Welcome to Startup Success today. We have a real treat. One of our favorite guests, Steven Lord, is in studio. He is Burkland’s Managing Director of Service Delivery and Chief Learning Officer. Welcome Steve.

Steven Lord 00:33
Thank you very much. Glad to be here.

Kate 00:35
Yeah, we’re thrilled to have you, because we have something very important to talk about, and that is kind of the state of the startup ecosystem. And then what’s going to happen now that we have an election that’s been decided. So I can’t wait to get into this with you. First, here we are, the end of 2024. Where do you see the startup ecosystem right now?

Steven Lord 00:58
It’s a really, really important question, because we’ve been sort of in this, yeah, weird environment for much of the last 18 months, really, when you go back and look at it. You and I had a conversation in a podcast, I think, a year ago now, talking about this. And if anything, I think the new year will bring a, you know, an adjudication, maybe, is the right way to put it, of that environment where we will start to unlock – there’s lots of reasons for it, but this is broadly a cyclical industry, and a lot of the pieces are falling into place for 2025 to be at least the beginning of the return to the kind of VC velocity that we all saw, you know, pre-pandemic, and maybe even a little bit after the pandemic. There’s lots of pieces to that. The first piece is venture funds will have additional capital to deploy. Second part is they will be more willing to deploy it going forward into next year, which is great for the startups. And I think this valuation issue that we’ve had for much of the past 12 months, at least, where startups have really been on their back foot from a valuation perspective, I think we start to come up off the floor a little bit there, and there’s a little bit of kick up in the valuation space. So all of these things kind of coming together, then overlaying it is probably toward the end of next year, a return of the exit pathways that VC funds really rely on to make all of this worthwhile in the first place. The last 18 months those have been very difficult. IPOs have been down. Private Equity buyouts, except being in AI, have been down across the board. I think those will start to unlock a little bit, which turns this whole thing back around again and increases the transaction velocity in space.
Kate 02:48
Wow, that’s great to hear. That’s what we’re all hoping, so that would be fantastic. Good, good. And the election. The dust has settled. For startups, what are the impacts? And I know there’s a lot.

Steven Lord 03:09
I think the biggest caveat with the election, and there’s so much ink spilled and so much hand wringing, and a lot of people are very concerned about how the election was going to come down. But really, regardless of where one sits on whether they like the outcome of the election or not, the impact of this particular election will depend greatly on what sector your startup happens to be in, right? If you’re in the oil and gas industry, any way, shape or form, this is a pretty good outcome for you. Those startups are going to get a lot more tailwind behind them. We’re going to have this energy independence policy, which is going to put a lot more emphasis on fossil fuels. Like it or not, love it or hate it, that’s going to be a policy plank of the new administration. The other thing that I think is important to talk about there is we will have a more maybe, what’s the right word, we will have a more pointed debate around things in the Inflation Reduction Act that was passed by Biden and Congress around electric vehicles and solar energy, wind energy and all of them. Now, I think the involvement of Elon Musk in the campaign, and his friendship with Trump, and they’re always going to play in the administration, notwithstanding, I think the support for electric vehicles writ large, will start to wane a little bit over the next four years. I think it’s actually already started to wane in favor of hybrid vehicles. So startups in that space, I think, will continue to do well. And I think importantly, startups in the renewable energy space – this is a little contrarian, a lot of people thinking they’re all going to be doomed – I don’t really think so. Mostly because of the energy demand needed by these other really hot sectors right now, like AI, right? So nuclear, wind, solar, to a lesser extent, I think startups in those spaces may find themselves with a little bit more of a tailwind than they might have otherwise expected based on what they heard on the campaign trail, right? (Okay, that’s a great take on that.) Then I think operationally, right? Defense and, you know, military startups obviously still a lot happening in the world. They’re probably going to continue to have a tail end behind them. Crypto is already having this push. Has already started to kind of price in what they think is coming. There’s a lot of those enforcement actions are just going to go away, at least the ones that are primarily crypto-specific, and not, you know, wire fraud or any of that, right? I think startups in that space, in FinTech in general, I think will be broadly supported by the new administration. Okay, then I think shifting operationally, the internal side of some startups will be impacted by things like the renewal at the end of next year for the Tax Cuts and Jobs Act, that 2017 tax package that Trump put through in his first administration. And what that’s really going to do is probably change or rescind some of the requirements that startups have suffered a little bit under in the last couple years. First among them would be like the section 170 R&D capitalization rules versus expensing rules that impacts their taxes more than anything else. But this past year, it’s been a thing, right? Startups that were maybe trucking along below break even, magically on their tax return become profitable because all those R and D expenses, which includes all your engineers and all of your data folks, all of that goes onto your balance sheet and not your P and L, all those costs go away. Poof, you’re profitable, and startup CEO is sitting there going, wait, what? I’m not profitable, right? I’m burning $200,000 a month. But from a tax perspective, that really was a curveball last year, and I would suspect that goes away in 2025 Another broad thing I think that is important for startups is this fundraising environment that we talked about a little bit before. You’re going to be a much more favorable environment for crypto startups going forward, particularly at the SEC. I think going to see a pickup in M&A activity, you’re going to see a pickup in VC activity. Startups that think they need to raise money, or expect they will need to raise money next year, should really start getting that together now. Because I think the environment is going to fairly rapidly shift. That’s another important thing to call out here. Cyclical sectors tend to snap back when they’ve gone through long periods of one extreme. And I don’t care what cyclical sector it is, we could be talking about copper mining. Doesn’t matter. They when it’s really, really dead – and I know that VCs haven’t been really, really dead, but when it’s been very far to one extreme or the other, it tends to snap back quickly. So all the startups out there think about being ready for a favorable fundraising environment now because when it shows up, it’ll be too late for you to then spend three months getting ready, three months getting your books ready, getting your model built, and getting your pitch deck done.

Kate 08:27
Excellent advice.

Steven Lord 08:31
You want to do that now because it will snap back quickly. There’s a ton of dry powder sitting on the sidelines. Believe me, the VC funds, they don’t want to be on the sidelines any more than you want them there, they just haven’t really been able to deploy the capital. And then, you know, like, I think there’s been a lot of hand wringing around tariffs. I think broadly, this startup ecosystem will be somewhat insulated from that. I don’t see a ton, certainly ours, certainly tech driven ones, the only place that we may find some things we have to watch out for next year will be contractors overseas. There’s some talk around already in Congress, around how they are taxed, so we have to keep our eyes out for that. There’s nothing concrete yet, but there’s some things there. We just want to make sure everyone’s across. And obviously we’re going to be talking a lot about that as it gets closer, if it becomes a thing, right? Now it’s just an idea.

Kate 09:27
Idea, okay, But yeah, that could have a big impact if it becomes a thing, okay?

Steven Lord 09:32
And what’s hard, I think, right now, is for startups to adjudicate between what is playing well with Trump’s base and the things that he said on the campaign trail, and what’s actually going to be feasible from a like actually put it into practice mindset. There’s differences. Yes, he does have, or rather, the Republicans have all three houses, but they don’t have all three by much, right? They. Only got a few seats of a majority in Congress. And remember, for all of the startups out there that maybe don’t remember this part of civics lessons they had in sophomore year in high school, the House does money, so anything that has to do with taxes, you know, regulations, things like that, the House of Representatives, where that majority is very, very thin.

Kate 10:23
That’s a great point. I think people forget that a lot. So based on all of this, it sounds like you’re pretty optimistic for the economy next year.

Steven Lord 10:34
I am. I am one of these macroeconomic folks that is typically early. It’s been an ongoing thing my whole career is I tend to see when these things are going to start to turn but I tend to predict that they will turn a little early. And that’s exactly what happened. Is, you remember, we were talking about having this sort of upswing in the back half of 2024. Didn’t happen. Interest rates didn’t come down as quickly as I had hoped they would and the election became even greater of a distraction than it normally is. It always is a distraction. But this year, I feel like it was an incredible distraction.

Kate 11:10
It got odd with, you know, an assassination attempt and somebody dropping out.

Steven Lord 11:16
Somebody dropped out. I mean, that never happens. So I think a lot of the pent up energy that I feel is in the economy is just sitting there, kind of like waiting for all of that to be over. So now look at just the facts in 2025. Interest rates are going to continue to go down. Right? To be really honest, the only thing that could give the Fed pause now is some crazy tariff thing that will upend the apple cart a little bit. I think Trump is too savvy for that. You know, bluster and bravado on the campaign trail notwithstanding, no one loves low interest rates better than Donald Trump. So I think when push comes to shove, he’s going to be aware of that interplay. And also remember, everybody, producers don’t pay for the tariffs, importers paying the tariffs.

Kate 12:08
Right, right? So true. That’s a good point.

Steven Lord 12:12
You know, a factory in China making rubber duckies for Walmart. They’re not paying the tariff because they’re just putting things in a box. It’s an importer that will pay a tariff. So I think he’s going to end up actually being very, very sensitive to import pricing in that sense. Which makes me a little less concerned about all of that. We started hearing 4,000% tariffs on some poor country somewhere. Don’t see it really happening. So, you know, tangentially lower interest rates, continued strong economy, the elections out of the way. If we are actually able to negotiate an end to some of these hostilities out there, that’s going to be a lot of back wind, tailwind for some of the economy. And I think there is still this foundational strength in the economy that we’ve all kind of glossed over. But employment is strong. (That’s true.) Inflation has gone down. Nobody wants to talk about it, but it did. It did go down, right? And you know, the wage inflation that we were worried about, the producer price inflation we were worried about, again, keep tariffs aside. All of that has continued to truck along in a pretty, pretty good fashion. So the underlying economy is actually already fairly strong. Now we take these other things out of it, chief of them being high interest rates. And I just think it could be a really good year.

Kate 13:32
I really do. Gosh, that would be fantastic. I like what you said too about tariffs and interest rates, because I think those are two things that people are still wary about, but I think you brought up good points about both.

Steven Lord 13:44
For sure. Remember, too, that moves in interest rates take 12 to 18 months to actually be reflected in the real economy. (Is it that long? It is?) Yeah, it is that long. At least it’s been that long since the Second World War. Maybe now is different. People always say that. I don’t think so, right? So we are just now getting through kind of the phase where those interest rates went up so strongly, right? Which is why we saw inflation go down. So all of this disconnected right? So now we’re at this kind of Goldilocks moment, potentially, where the Fed has room to go down, because we’re still dealing with sort of the impacts of the higher interest rates in the first place. And by the end of this year, the effect of the lower interest rates start to show up in the real economy. A big distinction here is there’s a difference between Wall Street and what VCs and startups may feel in terms of their fundraising and the real economy. Wall Street will price this immediately. You’ve already seen it, doing it right. But that’s not the real economy. That’s the forward economy Wall Street and VC valuations and things like that price the economy that’s coming, not the one we have. The real economy is the one we have right now. So I do think that come June, maybe we start seeing some pretty, pretty good numbers. We have been seeing good numbers, and I just think they’re going to get a little bit better.

Kate 15:15
I think that’s a really excellent point for people to remember, the real economy. I’m glad you elaborated on that, because it’s true, you get caught up in what you’re reading, right, that they’re reporting from the market and whatnot, but it’s very different from what’s actually in play.

Steven Lord 15:33
Right, right. And startups play such an important role in all this, because almost all of the job growth the economy ever has comes from companies that employ less than 100 people.

Kate 15:45
I always forget that, because we always see all the headlines from these large companies when they have these mass layoffs or they’re not hiring as fast, and it’s like doom and gloom reported. But I think that’s really important to remind listeners like the pivotal role that startups play in this.

Steven Lord 16:04
Exactly, and it is this cycle which people forget too, is that, you know, so you’re a startup, and you’ve got your founding team and three engineers, and then you get, you know, you get VC funding. Now you turn inside of maybe 12 months, you turn that team into a team of 20, 30, 40. Look at the impact that that has on everything downstream from there. For those 20 or 30 people. Startups are a huge job creation engine when it’s when it’s working right, when that conveyor belt is turning over. So I’m looking forward to that as well, because this is getting back to the beginning of the conversation with the sort of re-commencement of the regular financing cycle that I think we’re going to see beginning in 2025, we will be supporting that economic outcome that comes from greater employment. And those greater employed engineers are then all buying houses, they’re buying cars, buying baby carriages, you know, whatever it is that all of those folks then start spending money on, right? There’s a real power there. And, you know, it’s been kind of treading water for at least in startups, for the better part of two years.

Kate 17:17
Absolutely, okay, this is making me feel better. I have to ask, because it’s something that founders always have on their radar, taxes and, you know, any changes there and things that we should have on our radar going into the new year?

Steven Lord 17:38
Sure, there are relatively few foundational like this applies to everybody changes coming in 2025. If you are in the crypto ecosystem, big deal changes happening. January you have a different way to classify assets, crypto assets that you have on your balance sheet. Thankfully, finally, after five years of screaming about it, we now will be able to mark those assets based on current pricing. Up to now, you’ve only been able to mark them down. You’ve only been able to impair the asset because crypto is considered an intangible asset, like a patent. Now previously, okay, you marked it down because Ethereum fell 20% but if Ethereum went back up 25% you couldn’t, you couldn’t remark it. So all these crypto startups have been dealing with a pretty funky, really weird between two stools kind of situation where they have all this stuff at a higher value than their balance sheets were showing. So is it essentially carrying two sets of books, which is never a good idea, right?

Kate 18:49
No. That sounds so complicated.

Steven Lord 18:52
So we finally got around to now we’re going to be able to mark that to market. So now it’s going to be considered, just like if you owned copper or gold or something like that, you’re going to be able to mark it down when it’s down. You’re going to be able to mark it up when it’s up. So that’s a big deal. If you’re in crypto, or you own crypto, that’s going to be a big deal. Another very important thing, it’s not really tax, but it’s regulation, so I want to mention it. As of right now, this beneficial ownership rule that all companies need to follow is still on the books. There was a movement afoot in the fall that if the Republicans took control of Congress, they would repeal this requirement to basically fill out a FinCEN form to disclose who owns what in your company. As of right now, that is not on the table. So that requirement is starting Jan 1 going to be for all clients, you need to have filed it for January 1, or any company formed before 2024.

Kate 19:53
Okay, okay.

Steven Lord 19:55
In many cases, we are recommending your counsel fill that out. Because in many cases, your council is managing your cap table. Okay, right. So this is not really a financial thing. So we’ve had a lot of startups ask us if we could do it. It’s really not a financial job. It’s really for the counsel of the company to fill this out and make sure you’re compliant, but it comes under regulation, so I wanted to mention it.

Kate 20:19
Interesting, but that makes sense why counsel would be the appropriate party.

Steven Lord 20:23
We think so, yeah, just because I don’t want to be wrong there right in terms of some trust or some sort of LLC that’s got a unique legal standing which would allow them to either be involved or exempt from this requirement. We wouldn’t know that, and there’s been, there’s no math in this. So that’s literally, like, from our perspective, if generally speaking, if there’s math in it, it’s our job and if there’s no math in it, it’s counsel, right? And then I think the last thing I’d call out is, there is – so this 2017 Tax Act that Trump passed in his first administration, had a lot of things in it. A couple of the things that I think may impact founders from either California and New York personally, will be a repeal of the state and local tax exemption. Trump put it in 2017 so it’s kind of his thing, and now he talked on the campaign trail about repealing that because he wanted to get votes from these states. We’ll see if it actually happens. But if you are in one of those two states, personally, you may find you’re able to write off more of those taxes than you could before. That’s one. From your corporation’s perspective, from the startup’s perspective, what I think is going to happen is that the Tax Cut and Jobs Act from 2017 sunsets in the end of 2025 with both houses of Congress and low tax trumping back in the White House, I think what’s going to happen is that act will be renewed. So for startups, what’s in there that’s really great, actually, for startups, is the R&D tax credit will continue to be there. A lot of our startups have gotten pretty good checks in the mail, but checks in the mail about being able to get a credit on their payroll taxes for R&D, so that’s a big deal. Other things like basically corporate tax rates are lower now because of that 2017 rate, I think that’s going to continue when they’re renewed. Being able to accelerate business deductions, basically accelerate depreciation and amortization. You’re going to be able to continue to claim business interest deductions, which was part of that act. And you’re going to be able to, you know, continue to bring I, you know, I think I already said this, but if I didn’t, when we’re editing, accelerate 100% of the bonus deductions. All of these things… (No, you didn’t say that.) So that is going to be in there as well. If it’s renewed, and I suspect it will be renewed. So from a tax perspective, not a lot like visible, but the crypto, obviously, the crypto thing is a big deal. And the renewal of the Tax Cut and Jobs Act or called out there the TCJA, is very much in the cards for 2025.

Kate 23:15
Wow. It’s interesting because Trump was president once before, it kind of gives a little more clarity around what might happen. I can see, yeah.

Steven Lord 23:29
Tax is also one of those things that there’s a lot in the TCJA (I should say it’s the TCJA. I think I said MJ before) that is special interest oriented, right? So there’s things in there that Congress really had a hard time with before because of the makeup politically of Congress, this time, they’re gonna have much less resistance, which is why I think they’re going to just renew it. Okay, wave our magic wand, and that all just stays.

Kate 23:54
It makes sense. Makes a lot of sense. This has been so interesting and extremely helpful. You explain things so well, Steve. Any kind of parting thoughts for founders? I mean, I’m guessing from our conversation, you’re saying they should feel pretty optimistic about next year.

Steven Lord 24:14
I think so. Yeah, I think the big takeaway for founders is it’s always darkest before dawn, right? There’s a better environment coming, in my opinion. I think we’ve been waiting for this better environment to come, but now, with some of these sort of systemic things out of the way, for lack of a better description, I think that will open us up to having a pretty strong environment heading into next year. The macro economic environment will become favorable to startups, probably by the second half of next year. And I think the biggest takeaway for startups is, like we mentioned earlier, the time to prepare for that more favorable environment is now. It’s not when it appears. You have to be ready for the environment we’re going to have.

Kate 25:00
Excellent advice. I hope everyone takes note of that, because I think sometimes you think you don’t want to get ahead of yourself, but in this situation, it’s more like you want to be prepared.

Steven Lord 25:12
Yeah, yeah. And I think the last little parting shot is, I think startups, if there was a world where you just need to, like, put your head down and get a product that you think a VC will want to back, like, you can go out and raise money around a product, get that built. Like, don’t, don’t like. We’ve had a lot of conversations this year about startups stretching their burn and trying to manage in this weird world where they couldn’t really raise new money, but they needed to build a product. And should they just, you know, now, I think it’s you’re getting to a place where, obviously, resources notwithstanding, they need to be in a place where a VC can say, I need to be involved in this company, they’re really onto something.

Kate 25:53
Makes perfect sense, and it’s super exciting. I would hope for everyone. Yeah, absolutely. Thank you so much. I can tell everyone that Steve is very busy, so this was a real treat. Thank you, Steve and again, feel free to check out our website. burklandassociates.com we have a blog post that Steve wrote about this topic and other resources for founders. Thanks again, Steve.

Steven Lord 26:18
Thanks for having me. Appreciate it.

Intro 26:21
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