Thanks to some grossly overinflated high-profile IPOs, investors are running scared and changing the investment landscape in the process. Here’s everything you need to know, and how to adapt.
The fallout from the 'Vision Fund' disaster is changing investor behaviour, and the consequences are going to ripple out for years to come. Whether you're just getting started or approaching scale, this changing investment landscape going to have a significant effect on how you run your business. You need to plan *now* for what is going to be the on-the-ground reality 12 months from now.
The two major changes that you need to plan for are IPOs going out of favour, and venture capital funds — despite an excess of available capital — doing fewer, bigger, deals.
Why? Because investors have recently been burned in a very public manner. Between them, WeWork and Uber have soured the market on big, over-hyped, tech IPOs. There will always be some exceptions, but this trend is unlikely to end soon and we're likely to see companies who are too committed to the IPO path deliver lacklustre results (see Casper, for example).
Read: 'BREAKING NEWS: building a great software business is hard'
I've never been comfortable with how easily founders reach for an IPO as the default high-level exit strategy. There are so few businesses that have the underlying strength to make a great case for an IPO and it's such a long-haul to get there, so many things can go wrong.
There is already some evidence that the pendulum is beginning to swing back from a focus on market share growth at all costs toward creating profitable businesses. Not before time from my perspective, but if you weren't expecting to worry about profit any time soon this could be a shock.
What does that mean for you?
The prevailing mythology has been that you need an incredibly ambitious goal that is largely based on growth to dominate a marketplace and that such dominance will create opportunities (rent-seeking being an obvious choice) that deliver outsize returns.
This is what businesses like Google, Facebook, and Airbnb have done. It's interesting to look at two businesses that are arguably very valuable but where this has not happened: WeWork and Uber. WeWork is — despite a lot of frothy tech language in their S-1 filing — a property management company, not a technology company. The evidence is that they lost clients as quickly as they found them, as quite often clients would take a free period, then leave before committing further. They built no advantage in their service and couldn't create barriers to entry (indeed they paved the way for competitors), or barriers to switching. It turns out their "advantage" was having Softbank money to burn.
Read: Should you replicate a successful business model?
Uber, likewise, is a great idea (who doesn't love VC-funded, on-demand, ride-hailing?) — for a while, every startup was the "Uber for X". How did it all go wrong? Again their service created no sustainable advantage, no barrier to entry, and no barrier to switching.
There's a thing here too about founders and drinking kool-aid... both companies had ample opportunity and resource to do something different but chose not to until it was too late.
The evidence is that the underlying "market dominance theory" of growth is not generally sound. It requires a context in which market dominance allows the business to create intrinsic value. The point about the businesses that were successful in this strategy is that they had created something valuable that has a non-negligible switching cost and/or where the value of a transaction is high. Say what you like about Google, Facebook, and Airbnb, but they have done this and profited thereby.
Hindsight is 20-20 but it's arguable that WeWork and Uber could have been great businesses if they'd focused more on creating an advantage and being profitable, rather than chasing endless market growth with the expectation of more and more soft money.
Whether or not your business has the potential to scale to the likes of a WeWork or Uber it's worth understanding what went wrong and the implications for the future.
What should I do next?
Plan to do more with less
While raising your first £150-£250k probably won't get a lot harder, raising £500k-£750 is going to get even more difficult and, if you're burning hot, you need to start cutting your expenses now and extend your runway. That probably means cutting headcount. It's painful, but necessary if it means keeping your company around for the long haul.
Focus on growing value, not just your market
This means doubling down on product/market and product/channel fit now. Once you've broken even, you can then decide whether a market growth strategy still has the right dynamics for your business.
Get experimental
Prove what you know and that you know what's risky, and build on that. Don't develop any part of your product if you don't have good evidence that it creates strategic value.
Check your hubris
You have big plans but you probably don't have the wisdom of the sages or an angel on your shoulder. Don't believe your own PR, stay grounded, and do what's right for your company and the world.
If major names like WeWork and Uber have gotten it wrong, it's clear that building a great software company is hard. If you're undertaking this journey, you don't need to do it alone — get in touch if you want to chat with a software business consultant about your unique challenge.