The crucible year
Gil Dibner

Last week, the panel I was on at TechBBQ in Copenhagen was asked what the next 18 months hold. The question gave me a chance to organize my thoughts, and I wanted to share them here.

A three year adjustment cycle. My perspective is that we are about halfway through a three-year period of adjustment in the tech markets. By the end of 2021, it was clear that a slowdown was going to take place. The most sophisticated investors and founders were already making adjustments to their plans by the end of that year, but by the beginning of 2022, almost everyone knew something was about to happen.

2022: where we were. This was the year of slowdown, of slamming on the breaks. At the beginning of the year, the scale and impact of the slowdown was uncertain, but by the end of the year, they were well understood. This was the first year that sales performance was heavily impacted by reduced buyer willingness to purchase or by churn of accounts due to budget reviews or company shutdowns In hindsight, the impact of 2022 was both material and psychological. Up rounds nearly ceased as flat bridge rounds dominated the landscape. Sales forecasts and then targets were brought down in turn. Burn rates were cut. These types of material changes to performance and plans intertwined with psychological realizations that we were in for a tough slog. No one left 2022 with unrealistic expectations.

2023: where we are now. The current year, 2023, is — in my estimation — likely to be the long slow grind along the bottom. Founders, companies, and investors entered that year with a pretty sober understanding of where they stood. There would be limited or no additional capital. Burn rates had, for the most part, already been cut. There would be no new hires for a while. There would be no company offsite. Instead, the relentless daily work of engineering, product, and sales to exit the year with as much revenue (and, therefore, as much runway) as possible. The bridge rounds and the burn rate cuts of 2022 set many companies up with enough runway to get through the year — and so the crucial question has become in what condition will we exit the year? Will growth be impressive enough to attract investment? Will runway be long enough to reach breakeven in 2024 or will a round be necessary? Investors — especially Series A investors — seem for the most part to be unwilling to price risk. This has resulted in a complete lock up of new capital, but we’ve been ready for that since last year. For founders, if 2022 was a year of realization, 2023 is a year of execution in a new and very challenging reality. It is no surprise that we are seeing founder breakups at an increasing rate. These are the times that try our souls and test our partnerships. Not every founder or executive really signed up for this in their heart of hearts. Not every founder or executive was cut out for this. On the other hand, the achievements of 2023 are the ones that will write the history of your enterprise. Sales growth in this climate is an achievement to be celebrated. It means a great deal — much more than in years past. Keep at it. 2023 is the crucible year.

2024: where we are going. In 2024, I expect we are going to start to see the clouds lift a bit. Customer budgets may start to recover which may make it easier to grow revenues. Some optimism will inevitably return to the hearts of investors. IPOs, slightly lower interest rates, and perhaps an end to the war in Ukraine may contribute to a more optimistic vibe. For the majority of companies that limped across the finish line of 2023, the 2024 fundraising climate may not be forgiving if burn rates remain too high or revenue growth too sluggish. But for many, strong execution under adversity in 2023, reduced burn rates, and overall better execution learned through bitter experience will combine to create the conditions that will enable fundraising and sale. This is the darkest of nights, but next year may see the dawn break. It will not be roses and unicorns, but we are likely to return to a much more functional market in which customers are willing to buy and investors are willing to price risk.

When I look at the markets, at my fellow investors, and at our portfolio — whose struggles I know well — the sense I get is that we are on the bottom. We are not out of the woods yet, but we are making our way through them. My guess — if I had to guess — is that we are about half way through. Hang in there.

If you are just starting out. Many new companies born in 2023 are going to be far stronger and more resilient than they would have been had they started in 2021 or earlier. We are actively building our portfolio and looking for new investments — so please reach out!

Gil

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EUROPE & ISRAEL FUNDING NEWS

Germany / AI. Helsing raised $223M for its European “Defense AI” company.

UK / IoT & Telecom. FloLIVE raised $47M to scale its IoT-based cellular connectivity solution for the enterprise.

France / Fintech. Swan raised $40M to bring embedded banking to Europe.

Israel / Devtools. Port raised $18M for its open internal developer portal.

Israel / Security. Zenity raised $16.5M to build its governance and security platform for low code applications.

France / Semiconductors. UPMEM raised $7.4M to bring its “Processing-in-Memory” solution, which helps accelerate AI applications while reducing energy output, to market.

WORTH READING

ENTERPRISE/TECH NEWS

Flexport’s revenue down. According to The Information, Flexport’s revenue fell 70% in the first half of 2023 (providing some insight into why founder/CEO Ryan Petersen left his post at Founders Fund, ousted former Amazon exec Dave Clark, and is back at the helm). The freight market itself has collapsed, so Flexport’s revenue drop is not necessarily surprising. But it’s a good reminder that a company like Flexport is not a software company, with software margins, and shouldn’t be valued as such. Shipping is a cyclical business, prone to intense boom/bust cycles. And it seems like Flexport’s high burn left it particularly vulnerable to the crash.

2,851. Bill Gurely speaks at the All-In Summit about the negative impact of regulatory capture on startups and innovation. He highlights a few examples (one in telecom, two in healthcare) to show how damaging regulatory capture can be to innovation. Well worth a watch.

Gore’s sustainability trends. The latest sustainability trend report is out from Al Gore’s firm Generation Investment Management. The report does a good job of highlighting some reasons for optimism (real legislation is getting passed, renewable energy is meeting 80% of global demand, heat pump sales are through the roof) as well as reasons for concern (grid connectivity remains challenging, electric vehicle sales are up but battery minerals are dirty and expensive). Give it a read here.

HOW TO STARTUP

B2B PMF. Lenny’s latest is worth a read. Here’s his guide to finding product-market fit for B2B companies. According to his research, the median time to find product-market fit is about 2 years, but it ranges from months to 5+ years. One interesting takeaway is that very few founders reported ever feeling product-market fit. That highlights what I think to be one of the hardest parts of entrepreneurship…everyone (investors most of all) talk about product-market fit as if it’s a destination. But I don’t think it is. The product required to reach product-market fit will change over time. It’s dependent on the particular group you’re selling to, the alternative solutions available to them, the relative importance of the problem you’re solving and so on. Read more from Lenny here.

Hard work is hard work. A refreshingly honest take from Sam Blond, former sales leader and new partner at Founders Fund, on the need for startups to get back to working hard. “The days of work-life balance are over,” Blond writes. The pandemic and remote work created a moment where working less and still growing was possible. But no longer. And startups need to find positive ways to turn their companies back towards hard work if they hope to succeed. Advice from Blond in the thread.

Sales benchmarks for 2023. Lightspeed’s report on sales benchmarks for 2023 is out, and while it largely reinforces what we’ve all been feeling (it’s tough out there), there are some reasons to be optimistic. According to the report, quota attainment continues to trend down (in 2023, only 33% of reps hit their quota), as have win rates (down 11%), and sales cycles continue to increase. But renewal rates have remained consistent, suggesting there’s some staying power for existing tooling (the great CFO-driven SaaS cut that we’ve all heard about hasn’t happened just yet).

HOW TO VENTURE

Seed evolution. An interesting series of observations from our friend Semil over at Haystack. I largely agree with all of his points, and would highlight Semil’s point that the conversion of pre-seed/seed to series A has “suffered dramatically,” to use his words. That’s true globally, and one of the biggest risks to early stage companies right now.

LP understanding. A useful post from Charles Hudson over at Precursor Ventures for founders and venture investors alike. Just as venture investors and founders can sometimes be at odds (e.g. when a founder-acceptable outcome for the business is not big enough to move the needle for the venture investor…see Fred Wilson’s comment this past week on why smaller funds are more aligned with founders by default), the same can happen between venture investors and their LPs. Hudson reminds us that LPs are facing real challenges right now. LPs rely on distributions to fund their commitments, and distributions have been rare these past few years. If you’re a VC, you’re likely hearing your LPs talking about “DPI” a lot more these days. Founders should understand this dynamic. VCs are feeling this pressure from their LPs, which is why founders might all of a sudden be feeling pressure from their investors. As Hudson says, “all pressure flows downhill.”

PORTFOLIO NEWS

Steadybit’s CEO, Benjamin Wilms, spoke on an episode of the Tekpon podcast about the ins and outs of chaos engineering and resilience.

Aquant’s CEO Shahar Chen wrote about the distinctions between horizontal and vertical AI solutions.