Q1 Snapshot: The Startup Ecosystem

Intro 00:01
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Kate 00:18
Welcome to Startup Success. Today we have one of our regular guests who we love to have in studio, Steve Lord, who is the Chief Operating Officer of our home company, Burkland, as well as the head of our Knowledge Share program. Welcome Steve again to the show.

Steven Lord 00:37
Thank you. Glad to be here.

Kate 00:39
It’s always great to have you to get an update on where things are, and we wanted to get a pulse on Q1 2025, because I think everyone was expecting an amazing January, just back to the old days. Not quite what happened. (Not what we expected either, it’s fair to say.) That’s true, but I think people were a lot more optimistic after the dust had settled on the election. So maybe, why don’t we start with interest rates. Because that’s an area that hasn’t quite had the trajectory that people thought it would.

Steven Lord 01:20
Yeah. And, you know, the interesting thing about there, about the interest rates and the sort of double edged sword we ended up getting after the election, is one of the reasons why this is all taking longer. Because remember when we were talking last time, the uncertainty around the election was keeping everybody kind of at bay, and everybody was worried about what was going to happen, and the Fed needed to be very careful about what to do with interest rates, because the economic data still showed a pretty strong economy, and they didn’t want to be perceived as being political. So now fast forward, man, we’re going to talk about this further. You know, uncertainty reigns, right? And super importantly, the economy is slowing down. So in the last couple weeks, we’ve gotten the Purchasing Manager Index is dropping. Inflation is ticking up for all these reasons, for all the reasons we’re going to talk about in a minute. We’re seeing profit warnings from companies like Walmart. We’re seeing consumer confidence has plummeted. And one thing from 30 years of doing this, if the consumer in the United States decides to stay home instead of go to the mall, things start to tip over. So, you know, this is now the economic environment where the Fed can start to move. I don’t think we’re avoiding interest rate cuts. I think there’s been a push forward again to delaying them. I still am pretty hopeful that we get at least three this year, and the last data last week might even put, you know, the very next meeting into play. I mean, June is sort of what everybody’s expecting to be for the next cut. But I think the meeting in May, you might have a cut. The other thing I want to throw in there is the employment numbers. So, one thing that people aren’t really talking about is, we fire all of these people in the government, right? Which is everywhere in the headlines. Now you’re thinking about 300,000 is some of the economic expectations for either fired or retired. But in economics, there’s an amplifier effect with a person who’s let go unexpectedly. So in the econometric world, that results in about a million jobs, and that starts getting to a place where it’s hard for the economy to just absorb that over the short term. Most of the time, markets and economies can operate very well with dislocations that happen over a long period of time, but when they happen quickly or many in a compressed period, that starts to make things really harder – maybe is the way to put it. And I think what that’s going to do is incentivize the Fed to pick the pace, pack up again.

Kate 03:55
Okay. Thank you. That helps a lot, and kind of delves into where I wanted to go next, and that is this uncertainty. I do think, you know, everyone was thinking that would be less by now, and it seems to be greater. And in the conversations I have, it’s like the tariffs, the Federal layoffs, which, you know, I’ve read and talked to people, federal employees tend to be more experts in a certain area, harder to re-employ, high wage earners. There’s also contractors that are being let go that aren’t making as many of the headlines. It just seems like there’s a lot of uncertainty, and the spending has pulled back, both with consumers and businesses.

Steven Lord 04:42
Yeah, that’s always the thing. Like bull markets are great. Bad markets are tough, but uncertainty is the worst, because people just stop, they stop buying houses, they stop buying cars, they stop deciding whether they want a new washer and dryer, going on vacation. They don’t know, right? So when you add all of that up across the whole country, it really has this blanketing effect on the activity, back to that consumer we were talking about, right? And I think what’s also important to call out is there is uncertainty. There are millions of people in the country that are ecstatic about the cuts that are happening and the activities that the administration is taking on. So to be fair, there are people that think, you know, yeah, that’s what we need. The difference, to me, from a financial and a business perspective, is you have to be careful this doesn’t become chaos for the sake of it. There’s a lot of this that is playing out for how it looks versus how it’s actually going to be. You just mentioned these experts, right? These are people inside the government, you’re not necessarily going to just find another one for half the money. It’s not the private sector. That’s not how this works, right? And so there’s an adjustment period there. And right now, a lot of this seems to me to be chaos, for the sake of it, to show that we are doing something. And I wonder if they’re going to regret the speed and the impression that they’re actually making in terms of business people deciding, Look, I have no idea who’s even regulating me anymore. I’m just gonna wait. There’s a real concern there, and it isn’t although I suppose we should have known there was a possibility this would happen. This is one of these outlier events that nobody really was predicting prior to the election. We kind of thought the election would happen with Person A or Person B. There’d be a bunch of disappointed people, a bunch of happy people, and then more or less everything would kind of settle back down. And it’s been the opposite of that. That has consequences, real life consequences. So for startups too, I think one thing that’s important to mention is a lot of the, not SaaS and not technology per se, but a lot of healthcare companies, a lot of clean energy companies, a lot of these firms rely on both grants and funding from other places, and they are very regulated. So FinTech startups, these are all companies that are staring at this, going, I don’t even know who to email anymore, and that is having a dampening effect.

Kate 07:05
Yeah, I wanted to get into that. I was talking to some people about this this morning, like, if you’re a startup that has grant funding right, and it’s paid on a schedule, they feel like there’s no guarantee anymore, even though it’s been promised to them, because lots of things have been promised that have been cut. Do you agree?

Steven Lord 07:24
100%. The safe haven of well, it’s legal, I have a contract. There’s a cadre in Washington right now that doesn’t care what the contract says and they’re going to fight it out in the court. But if I’m a little startup that’s relying on a grant to disperse every quarter so I can make payroll, I don’t have 18 months to see how the court case will play out. So it is definitely a fraught time. I do think there are long term benefits to some of what’s happening. I do think that the government has never been a model of efficiency, right? But, man, it’s going to be a little tough between now and then. That loops us back to the interest rates. If they’re smart, they start to cut again, so we have a little bit of refuge on the liquidity side.

Kate 08:04
Okay, so that’s where you see it headed. And then just to get back to the startup ecosystem, maybe we start with VC funding. What do you see so far? I mean, I know we’re early in the year.

Steven Lord 08:19
It’s fascinating because I think we are starting to see some activity pick up. Certainly, that’s what we’re hearing. Partners of ours in the ecosystem that we talk to regularly, they are taking deal flow, they are looking at it, they’re writing some checks. We also see the derivative indications, like, there’s an uptick in audit pre readiness. There’s an uptick in, you know, making sure we’re ready for a quality of earnings review, or we have CFOs being asked to begin modeling further out than they were last year, even in last fall. And these are all things that we anticipate are going to be the precursors of that ball starting to roll back over again. They’re definitely impacted by some of what we’re talking about. So I would expect the sectors to still try to stay away from the uncertainty as best as they can. But I think if you’re hoping to raise money this year, we’re going to see a continued reversion to the mean in terms of it being a little bit more of a normal market than we’ve been in for the last couple years. And I hope I’m right.

Kate 09:21
I hope you’re right too, yes. And I like the fact that we’re seeing more capital deployments and investments. I mean, they’re kind of in a tough situation, VCs, because their models changed a little bit there. There haven’t been a lot of successful IPOs.

Steven Lord 09:39
No. And so they’re getting a lot of pressure from their LPs. The whole model doesn’t work if the cash doesn’t flow back out again at some point. And the same sort of hesitation we were talking about at the end of last year and the beginning of this one, for strategic acquisitions, that pace is a little tough, because those folks are also uncertain. They don’t know what their world is going to look like. The cost of funding is high, higher than it’s been. So like all of that does play a role. And we just went through 18 months or so of this giant reset in the VC space, particularly around valuations. And I think that is now run its course. So while none of this is going to happen quickly, I do think 2025 will be a more normal year than we’ve had before, at least in the last couple years. And for startups out there, you may not be able to raise at the valuation you’d love, but you may be able to raise that valuation that you like, you know, versus a valuation you hated last year.

Kate 10:38
Great. Okay, that’s optimistic to hear. And you think we might see some IPOs and that whole cycle return back for VCs?

Steven Lord 10:51
I think it will be tough. I think you’ll start if everything else happens the way we’re hoping it will, right, and the world is not a dramatically different place in October, I think you might see that pace beginning to pick up in Q3, Q4 maybe late Q3 early Q4. Because remember, even going from day one to filing an S1 for an IPO that’s three to six months just that. So they have to almost be starting now to be able to be doing it actually in the fall. So I think it might be late this year into early next. Bear in mind too that the regulatory oversight of places like the SEC is being impacted here as well, so maybe that timeline, for better or for worse, is shorter after all of this.

Kate 11:39
Okay, that makes sense. We’re still seeing a lot of good M&A activity, like I just read, startups are buying other startups. So that’s, you know, optimistic too.

Steven Lord 11:49
You know, the old saying is, when you can’t move forward, you move sideways, right? So some startups are recognizing, Okay, this is all connected. That’s an important thing that people have to always remember. The startups need scale, they need market reach, they need product market fit. They need all of that stuff in order to get the valuations where they and their investors would like them to be. So if I can join forces with an equity swap or something else, that’s not going to kill my cash balance with another startup, and then I can go out to the market together. We just had one of these a little while ago. The sum of the parts is bigger than the individuals together. And startups are starting to figure that out. It’s definitely a late cycle sign. It’s pretty common, right? As everything starts to turn back up again. So I’m not surprised, but it’s good to see, because it shows people are being creative.

Kate 12:38
Yes, it is good to see, I agree. So let’s talk about the startup ecosystem a little more. Is AI still super hot and where most of the investments are being made?

Steven Lord 12:52
Yes, of course, right. Broadly, what we see is, which we predicted but we didn’t think it would happen this fast, like a lot of things with AI, I think the initial valuation craziness is a little over. We’re even seeing that in the public market, stocks like Palantir are being sold off pretty hard. What is interesting is, I think you’re beginning to see the bifurcation, or the stratification of the market, even within AI, even now, even already. So you’re starting to see VCs becoming very interested in funding particular segments of AI – use cases, industry, specificity, things like that, which we thought would maybe be a two year run, is now been a year run, six month run. So I think there’s going to be a lot of activity this year heading into the fall for niche focused AI in place.

Kate 13:42
Okay, that makes sense. And then FinTech, you spoke a little bit about that sector. How’s that sector faring?

Steven Lord 13:51
So FinTech always ebbs and flows with the rate structure and the regulatory environment and the ease with which people are able to move money around, right? That is right now a little bit under siege, really, from every area. They don’t really know what’s going to happen. There’s a move to abolish the Consumer Protection Bureau. There’s the SEC, the crypto market doesn’t know if they’re coming or going right now, because, you know, the SEC just dropped all these lawsuits and the market fell. So there’s just all of these cross currents in FinTech right now that I think still need to be worked out. Broadly, though, going forward, if all of these regulatory steps stick, it will be a very favorable operating environment for anyone that has anything to do with lending tech, payments tech, crypto, anything that facilitates the movement of money from one place to the other, I think that’s coming. It’s not there yet, but it’s coming.

Kate 14:45
Oh, that’s great to hear. Good. Finally, what about SaaS?

Steven Lord 14:49
I think SaaS, the interesting thing with SaaS, in my opinion, anyway, is that you know, squint hard enough and everything is SaaS, kind of like fintech. Eventually, everybody’s a fintech.SaaS has gone through this resetting of expectations around what a subscription model can really do. I think we had every, you know, everybody was really excited about SaaS, and every startup had to have some sort of SaaS module. And then they kind of all tried really hard, and sometimes they tried too hard and made things subscriptions that really shouldn’t be subscriptions. So what we’re seeing a little bit now is a move amongst startups to acknowledge that, You know what, we’re enterprise SaaS, if at all, We’re once a year; we’re big six figure contracts; we’re not interested in selling a $5 app in the App Store. And I think that’s been a healthy transformation within SaaS. The other thing, which continues to be the case is that uncertainty also plays a role in things like this, where you have the SaaS model of high velocity, of getting a million users buying your thing or even signing up for your thing, and then we’ll monetize them later. That also gets stretched in this kind of environment. So I think SaaS companies are going to need to really have compelling stories, compelling economics, and most important, they need to have their metrics figured out. Don’t go into an investor meeting right now without knowing your ARR, MRR, net dollar retention. Nowadays no one gets a fair gets a free pass for not knowing that stuff going into these meetings. It’s too easy to calc, it’s too easy to find.

Kate 16:28
Gosh, great advice. Yeah, that’s so true. Yeah. So you’ve given us a really great portrait of where things are right now, and there’s some optimism in there so that’s good. Anything else you would share for startup founders listening in this Q1, kind of checkpoint?

Steven Lord 16:50
Yeah, I think if everybody takes a minute, everyone listening, every founder on this podcast takes a minute and asks themselves, Are we really secure when it comes to cyber? Have we talked about this? Does my team know what to look out for when it comes to malware, phishing emails, invoice fraud? It’s out there, and there’s been a big uptick in what we’ve seen of people out there trying to get tricked, or people who are trying to trick people. So I would ask all of our founders, if you’re listening to this and you’ve got a company, ask yourself, Have we even talked about this amongst our staff? Have we got a plan? Do we know the difference between this kind of cyber fraud and that? What’s our go-to if something happens to us? Do we have E&O insurance? Do we have cyber insurance? Sort of a bit of a PSA moment, but believe me, you want to be having those conversations before a problem and not afterwards. So I’d ask everybody, just ask yourself, are we ready? Do we know what will happen if, because it’s important.

Kate 17:52
I really appreciate that, because I personally have seen a huge uptick in phishing and, you know, like cyber attacks, but I kind of want you to delve into that a little bit, because I feel like on this show, whenever people bring up HR or cyber security the founders tune out. For those that haven’t yet (laughing). But seriously, can you give a broad example of something that could have I mean, like, you know, I just feel like everyone thinks it’s not going to happen to them that a cyber security threat their startup doesn’t make the radar. Does that make sense? Because they’re not dealing with, you know, millions of credit card numbers or whatever. They think it’s big guys.

Steven Lord 18:43
Sure. It can be any number of vectors, any number of threat angles, coming into a little startup, right? Particularly if you’re all remote, you’re not sitting next to each other, you’re not talking all the time. All you need is a PDF attached to an email that looks like it’s from a vendor that puts a key logger on a laptop somewhere you’re not, as a founder. That person enters banking information, and next thing you know, there they are, and you’re dealing with a problem, right? You could also have IP trade secrets at risk from something like that. So if you’re a founder, like you said, and you’re still here. Thank you. And you’re wondering whether this is a problem for you. This is one of these, not if, but when, type of things. You probably have already almost been hacked. You just didn’t know it, right? And then when you’re a startup founder and you’ve got investor capital, you have to worry about this stuff, because, again, no one is going to look anywhere else when there’s a problem. You’re a CEO, you’re a COO, you’re a founder of a company. You are expected to have either put in procedures and policies to train your people to watch out for this stuff and/or gotten insurance to cover the company if you didn’t, right. The ones that we really hate to see are when they did neither. They’re, you know, engineers, and they’re building a product, and they’re really heads-down on that, and then they have to go to a board and say, Well, yeah, actually, we didn’t do any of the things that any reasonable person would do, and that’s tough. It’s a tough conversation to have. If you’ve taken outside capital, you are the steward of that capital, and you have to be careful. You have to be aware and take steps to mitigate the company being very impacted by one of these events. And they’re so slick, they’re so good.

Kate 20:30
I would tell people listening, just personally, I work with a nonprofit, and I’m on the financial board, we never would have thought that hackers would go into our email, right, that we would even be on their radar. They got in and they started texting us the most authentic looking texts about something that was really happening in our foundation because they had read all the emails and we almost fell for it.

Steven Lord 21:01
That’s right. The days are of you know, Hi, this is the New York DMV. Your license is expired and “your” is “ur” right. Those are gone. They’re not. They’re out there, sure, but everybody can spot that. It’s the ones you’re talking about that look and sound and feel like a conversation you’re already having, yeah, and seems like a completely legitimate request. That’s the tough stuff.

Kate 21:26
Yeah, they were so sophisticated and added in details about an endeavor that this non profit (which qualifies it.) Yeah, it was crazy.

Steven Lord 21:36
So yeah, that’s what my ask would be. I mean, all of the other stuff, notwithstanding, this is all really important for founders to listen. But this is one of these things that if you want to have it and not need it, instead of needing it and not having it, you want to have had this conversation. And it’s important. It’s just, I know it’s not sexy. I know it’s not what everybody wants to spend their time on, but trust me, when I say a couple hours worried about this will save a tremendous amount of pain, if you do become a target.

Kate 22:06
Great call out. I did not see you going there, so thank you. Anything else? We’re gonna have Steve back on in Q2 for another…

Steven Lord 22:14
I hope I’m right with my interest rates.

Kate 22:18
Any other parting words?

Steven Lord 22:20
Yeah. One last thing, there is very little doubt in my mind now that the interest rate structure will move downwards over the next 12 months. It’s taking longer than we thought to get there, but with the economic data coming in, it’s actually more likely to go further down faster than I thought. So what I want to make sure all the founders are doing that have raised capital, that have some kind of treasury management program in place, talk to your finance team, you know, CFO, accounting people, ours, or someone else, and make sure that you are not loaded up to the gills with financial instruments in your treasury program that will reset lower and lower and lower as those rates go down. Right now is the time to move those in, to lock in those higher rates, especially for capital you know you’re not going to need for a year or eight months, take the higher rate now, because in six months, it’ll be lower.

Kate 23:10
Great Call out. Thank you. Really good.

Steven Lord 23:14
And if you don’t know what I’m talking about, or you don’t know how to do that, please call us, because we can help.

Kate 23:19
That is a great call out. Thank you. Lots of good nuggets here, Steve. Thanks so much for joining us. We’ll see you next quarter.

Steven Lord 23:29
You bet. Thanks. Take care.

Outro 23:31
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