Q2 Snapshot: The Startup Ecosystem

Intro 00:01
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Kate 00:17
Welcome to Startup Success. Today, we have one of our favorite guests in studio, Steve Lord, who is the Chief Operating Officer and Chief Knowledge Officer at Burkland, our home company. Hi, Steve.

Steven Lord 00:34
Hey, how are you?

Kate 00:35
Thanks for joining us again.

Steven Lord 00:37
Thank you for having me.

Kate 00:38
We love talking to you because Steve comes on and it’s one of our most popular episodes, and gives us kind of the status of the starter startup ecosystem and where we are. So here it is, the end of Q2. Can’t believe it. So every time I talk to you, things seem to get more and more uncertain instead of the other way.

Steven Lord 01:00
Yeah, I know. I keep waiting for it to end and it doesn’t seem to be doing it. I think that’s kind of the big takeaway. We meet periodically, and we look at where we are, and I kind of take a macro view of the whole thing. And what you said about the uncertainty is really the watch word for the moment. With everything going on in the federal government, the administration, the news headlines we all see, not just about the economy, but a whole bunch of other stuff. Right? Immigration, trade policy, all the way down to Iran. You know, we started dropping iron on people’s heads out of the blue. Politics left or right, there is this non-stop drumbeat of “Wow, look at that,” and that is causing this veil of uncertainty that we’ve been talking about, hopefully dissipating, now for three quarters, to persist. And I can’t stress enough the impact macro economically that has not only on the VC and startup ecosystem, but the economy as a whole. It’s a big deal. People delay hiring. They delay investments. No one really knows what’s happening with this whole tariff situation. So does that mean I build my new factory here? Do I take the hit on the labor cost, or do I try to find a tariff advantaged country. Do I wait and see if all of this blows over? Because a lot of the stuff that the current administration likes to do is a lot of bluster, and at the end of the day, history has shown that it isn’t as long lasting as initially feared. That key thing, wait is starting to really have an impact. The other thing I wanted to call out is we don’t know yet what the tariff impact will really be. For two reasons: One is the tariff impact may be dissipated by “deals.” Some of the countries where quote deals have been made, actually, some of the deals we already had in place that have been packaged again and turned into new deals, but regardless, right? And the markets have an interesting ability of discounting what they think is going to happen, and they’re usually pretty good. So you know, you have these dual effects of the deals that aren’t really deals, and in some cases, new trade relationships will get worked out, but the real downstream hit or impact of those things are six to 12 months away. So everybody doing a happy dance in looking at the May and June inflation readings are not paying attention. That’s too soon. We won’t see it in inflation, we won’t see it in jobs, we won’t see it in any of these other things until the fall, at the absolute earliest.

Kate 03:50
Wow, that’s a long time.

Steven Lord 03:54
You’re starting – actually one place, I will say we may begin seeing it is a little bit like the pandemic, in that you are starting to see supply chain bottlenecks that could be related to the tariffs. For instance, there are some PC manufacturers that have stretching into six week back orders right now. It may not be that, may not be directly related to tariffs, maybe more related to the uncertainty we’re talking about, but it’s there. It’s something to watch.

Kate 04:23
Interesting. There’s really no way to predict this lead time in the fall if it’s going to be positive or negative.

Steven Lord 04:31
For the world that we’re talking about in terms of the startup ecosystem, there’s little of the tariff discussion that I think is positive for the startup ecosystem. Where tariffs so this is taking another big step backward – tariffs don’t set things like trade deficits. Policy sets those things because a tariff is counteracted and sort of counterbalanced by economic adjustments in other places. Macro economically, you might see a lot of headlines, Oh, our trade deficit with this country went down thanks to the tariffs, right? But what that actually also can mean is that imports from that country cratered. So you don’t see that part of the ledger, right. You see, the trade imbalance is not a tariff driven thing. Trade imbalance is driven by policy. So you could say, Okay, we’re going to get $5 for every pair of headsets that are imported from China. Awesome. Then everybody who’s importing headsets from China will buy fewer of them. So the trade deficit adjusts. And everybody’s like, aren’t we awesome? And in actuality, the economic activity hasn’t really changed. For startups, what it means, though, is supply chain, investment, hiring, VC activity, all of that stuff is still, unfortunately, a bit on its back foot, because we just don’t know what’s going to happen. Then on the other side of it, if the tariff experiment is successful, at least in bringing down headline trade deficits, right? And this big bill that’s currently in Congress being debated passes, they will almost cancel each other out, right? So the bill is looking at adding, what, $3 trillion to the deficit, the federal government deficit. Who cares what happens on the trade side, right? I mean, so now..

Kate 06:32
Right? That’s the big question. It’s such a big bill.

Steven Lord 06:36
And it’s so lopsided. And I understand there are reasons in that bill that people are very passionate about that fix or address particular things that they believe are very important. But if you take the argument that some of the same sponsors of that bill take that we have to fix our deficit, our trade deficits, because of the interest rates, now, you know interest rates tend to be higher when you carry a high deficit, but well, then we’re, like I was saying before, we’re fixing it on one side of the ledger, but then we’re blowing it up on the other. The net result will still mean a risk of higher interest rates.

Kate 07:13
Right? Absolutely. So do you think Elon Musk is on to something when he’s so adamant against the bill.

Steven Lord 07:23
The bill is not, I do. I don’t say this often or lightly, but I do agree that some of the things that Musk is pointing out about the bill are accurate.

Kate 07:32
Yeah, it sounds, it seems like it, right?

Steven Lord 07:36
He’s right in fearing for higher rates, higher inflation, millions of jobs potentially being at risk. I think there’s a little bit of hyperbole in there, but maybe not a lot. Now, the other side will say, Oh, but that’s okay, because we’re going to replace them by all of these factories that are going to come back to the United States. The problem is that they take five years to build. So I don’t think this constellation maybe of different moving parts is a net positive for what we care about a lot, and that’s the VC and venture-backed startup ecosystem. The only thing I might say that is on the plus side is we’ve been in this holding pattern for so long, and all of these VC funds have to get capital to work.

Kate 08:28
Right.

Steven Lord 08:30
There is an easing bias at the Fed, particularly because of all the uncertainty. So I do think we still will see interest rate cuts. I know I’ve been saying that…

Kate 08:41
You’ve been saying that, and I’m waiting.

Steven Lord 08:43
Every quarter I think they’re going to happen, and then something else happens. The only thing that might cause it to pause is, remember the Fed is a data driven organization. They have to look backward, right? So that means they’re always a little behind the curve, because they wait for data to print before they do something. Honestly, that’s why we haven’t cut yet I think, because they are saying what we said earlier, they don’t know what the impact of the tariffs is really going to be. They don’t really know what the impact of this huge bill is going to be. They have an idea, right? But so they’re having a hard time cutting now until they have a better sense of that. And we’ve got the administration making noise that they’d like to appoint, potentially, the President as the Federal Reserve Chairman. And, you know, again, politics left or right, that would really be a problem that would cause a lot of people to be very concerned about the independence of the Fed, and that would that. So back to that uncertainty again in terms of when we’re going to actually see these cuts.

Kate 09:53
So for VCs to really move and get off – I mean, they’re, they’re making investments, but it’s very hesitant, slow going – to really get back out there. You think there needs to be less uncertainty and maybe some, maybe some movement down in interest rates just to get things going.

Steven Lord 10:15
100% those two things I think would help a lot. At least one cut and a break from the news feed baloney that we keep dealing with. And maybe another way to put it too, is visibility, right? Because uncertainty means your visibility is very short. If we can get to a place of a little less chaos that gives the VCs confidence that they can see, see a little bit forward and know the environment that they’re going to be dealing with a year from now, two years. Remember, their horizons are very long, right? So they’re looking at writing a check into a company, they’re looking at staying with that company for five years. (Five years, yeah.) That’s a long time with things changing, literally daily and literally weekly. It’s hard for them to pull that trigger. Now, I will say that in the last few weeks, we’ve started seeing and hearing some interesting things. For instance, I think there is a building interest in companies that are onshoring tech. So that means potentially in reaction to the tariffs, but also just the world geopolitical situation we’re in, companies that are looking to bring tech and tech production back on shore. VCs are interested in that. AI continues to be the pace driver for the whole thing. I think we’re seeing interest in healthcare, which, if you think about it, the equity, the public equity market, acts the same way. Healthcare is a bit of a safe haven for capital in times of uncertainty, because everybody still needs healthcare. And then I think you have a continued, maybe is the right way to put it, trepidation around consumer related startups, because people worry about the consumer. In this environment, the consumer takes less vacations. They buy less things, they don’t replace the washing machine, they don’t buy a new car. All of that starts to slow down. So I think that area will remain weak for the time being.

Kate 12:16
And I mean, there’s still so many signs of that on the consumer-side, they seem very skittish. How much pressure are the VCs getting, though, do you think to deploy some capital?

Steven Lord 12:29
Quite a bit. And I think how that’s being manifested is in valuations. So for the deals that are getting done, the valuation conversation is still very difficult for the founders. You know, we’re seeing continuation of flat rounds, plus ups, all of the continuation rounds, things like that that say everything they possibly can, except down round. We are still seeing down rounds. And even when it is not a down round, I think even when it’s fresh capital, the valuation conversation is definitely still favoring the VC. So that’s how I think it’s happening. They are getting a lot of pressure to deploy capital as they should. They’ve been sitting on a lot of capital for a while, and for all the reasons we’re describing, they’re telling the LPs, Look, would you rather us write a check by mistake and you’ll regret it later? So I think it’s still a good conversation for them to have, but they’re still driving hard on value. Something to point out for the founders that are listening, you are not without good arguments to counter those conversations, right? Because if you’re attractive enough for the VC to be looking at you to invest, you have business case reasons to defend your valuation. Don’t be crazy, right? But don’t blink necessarily. Assume that the VC is going to try to knock your valuation down and have good reasons why they should pay up, you know, a little bit higher on valuation.

Kate 13:55
Okay, that’s good advice. Any other advice you would pass on to founders right now during this time?

Steven Lord 14:01
I think, particularly because of the valuation conversation, SAFE notes continue to be a pretty popular mechanism, because it does sort of delay that combo. So particularly for I’d say, seed and maybe early A founders, try to get the first capital in the door on a SAFE. And if you need help understanding what I just said, you know, give us a shout, we’d love to help. Because that’s a pretty functional mechanism to get capital into your business and avoid some of this difficult conversation until the business is more mature.

Kate 14:38
That makes sense. That’s really good advice. Yes. So I know you don’t have a crystal ball.

Steven Lord 14:44
And if I did, it’s certainly not been working very well.

Kate 14:47
Well, no, but I mean, do you see, I know you were very eloquent in explaining why we aren’t going to understand the full impact of tariffs until the fall at least, but anything, I’m guessing the summer will probably be slower, because it’s summer, but are we hoping for more of a pickup in the fall?

Steven Lord 15:11
That would stick to the traditional calendar for activity. Same with M&A. One thing that I do think is interesting is I would have expected more M&A activity by now. We did predict that in our last call, and it hasn’t really, there’s been some but it hasn’t really kicked up. I think back to that uncertainty mechanism. There isn’t much yet that suggests the fall would be less active. And so I think if you look at the historical pickup in the fall. It’s probably still likely, but it may be coming off of a pretty quiet pace, because this time of year, with everything going on, I don’t blame VCs from saying, You know what, I’m going to wait. I’m just going to wait. I think if I was back doing that world again, I would look twice before I put a lot of capital to work right now just because of what’s going on. I mean, I hate to say it, but there is a lot of reason to just sit on your hands unless something swings by you that you absolutely need to be in the newest, greatest, latest AI startup. Why would you rush right? Right? That startup that you want to fund, they’re still going to be there in October, and by then, you might have a rate cut, you might have Iran stable, you might have the trade wars settled down. I mean, think of all the stuff we could tick off right now that shows just a lot of uncertainty out there.

Kate 16:31
I feel like every time we meet, there’s something new to the list of uncertainty.

Steven Lord 16:41
And that’s the sad part.

Kate 16:42
That’s the sad part. Instead of moving away from it, the list of what’s driving it is getting longer.

Steven Lord 16:49
One thing I think is important to call out is in periods like this, and there have been a bunch since I’ve been doing this, and you’ve been doing this, one thing that can start to happen, I think at this point, is people begin to just bake the uncertainty in as a part of doing business, right? They get so used to, like you just said, they get so used to, Well, every quarter is going to be one new thing. When we last spoke, nobody expected we’d start dropping bombs on Iran out of the clear blue sky. That becomes then, kind of like we had with the pandemic. It sort of takes a baseline characteristic to it, and we start seeing the activity anchoring from there. If that happened, I think the fall would be strong, because people would just go, You know what? Okay, it’s uncertain, we got to get back to business. Kind of like the pandemic was, right. Index, everything that’s just crazy, and work from there. If that happened, I think we’d have a good fall.

Kate 17:46
Okay, like the new normal, like it was. All right. So I guess we can hope for that. Well that’s helpful. I appreciate the call out on, you know, to founders on ways to keep things going.

Steven Lord 18:03
I think too, another quick call out is in that kind of environment, say we get to a new normal where uncertainty is just baked in, the more a founder can present a buttoned up investment opportunity for a VC, the easier it will be for them to to get funded, because in this kind of environment, they’re kind of looking for reasons to pass. They’re not ever so don’t show up without a model. Don’t show up with your books not closed. Have a business plan, have a hiring plan, have all of that stuff, even maybe a capital plan, so that you present the whole package to a VC. I think right now more than ever, that’s probably very important, so the VCs don’t need to scratch very deep to get to a place where they can say yes.

Kate 18:50
Oh, that’s great advice. Really good advice. Thank you. Thank you, Steve. I appreciate you being here. It’s always super helpful. Yeah, We will see what the conversation brings in Q3. Hopefully not a much longer list.

Steven Lord 19:07
Hopefully, exactly, hopefully at least the same, maybe a little better look. I think it’s also important to call out there is a world where all of this stuff actually works, and all of these things that are in motion end up netting out to a positive outcome. I don’t want to discount that that’s certainly everything is possible, anything is possible. So I did want to call that out. I am skeptical, certainly economically, but…

Kate 19:38
But it’s a possibility. Yep, absolutely. Thank you, Steve Lord for being here. Shameless but important plug to Burkland. We do have a lot of blog posts. Steve has some on there of tools and tips to help you with cash runway and other resources right now. Thanks again, Steve.

Intro 19:59
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