Continuing with the thread that there are a number of anomalies in startup land now, there’s another one worth discussing. While the vast majority of startups have slowing growth rates, many will reaccelerate. Yes, the new growth rates will be slower than during the pandemic, but these are excellent businesses where growth is masked by extenuating circumstances. In addition, reaccelerating growth rates improve a number of aspects of the business from morale to recruiting to valuation.
First, let’s dive in why reaccelerating is imminent. COVID pulled forward a tremendous amount of demand taking companies from good growth to hyper growth in a span of 6-12 months. Today, a startup that might be at $50M of revenue would likely be at a much lower number if the pandemic didn’t happen — still a great business but a smaller business. In addition to growth being pulled forward, startups often sell to other tech companies as they’re early adopters. Of course, these tech companies had a COVID boost as well so they hired a huge number of new team members, resulting in even more software spend. Now, these tech companies and startups are doing many rounds of layoffs, and reducing their non-employee costs a corresponding amount. Finally, one more added challenge: the cost of capital went through the roof due to significantly higher interest rates and lower valuations. Startups that would have kept their burn rates up in the past cut even deeper to conserve cash, and that resulted in more layoffs.
Bringing all these factors together results in higher churn rates and reduced consumption revenue that is worse than anticipated. Record high downgrades and cancellations translates into even lower growth rates. Premature increased customer growth plus premature downgrades and cancellations paint an incorrect picture. Startups would do well to take their historical gross and net renewal rates applied to their core business and project out potential scenarios. Core growth plus traditional renewal rates will likely result in reaccelerating growth in the near future.
The good news: once this painful series of adjustments works its way through the system and we’re at the new normal, growth rates will improve. Many startups have strong business models delivering tremendous value to their customers. The lack of growth is masked by remnants of one-time extra growth and one-time extra churn. Higher, renewed growth is on the horizon.