Lean Times and Inside Rounds for Startups

Recently a friend asked how things were going in startup land. With the continued overall economy still growing and the jobs report strong, he was curious how that translated to the startup sector. My summary: our industry is defined by lean times and inside rounds right now. 

On the lean times front, startups are a struggle as companies are still cutting budgets and reducing spend to handle slowdowns in their own industries. Things haven’t fallen off a cliff. Rather, business is OK therefore tech spend is OK. Only, this is compounded by higher churn from the small percentage of companies that are struggling. This is further compounded by layoffs that already happened, and now at renewal time, it’s a downgrade. Fewer new sales and more challenging renewals are a recipe for continued lean times. 

On the fundraising front, very few deals are getting done. Entrepreneurs are doing everything in their power to avoid having to raise money as valuations are still dramatically lower than 18 months ago. And, with interest rates expected to rise two more times this year, startup valuations have a chance of going even lower (higher interest rates make risky investments like startups less attractive). 

Modest angel and seed rounds are still getting done while later stage deals aren’t. The most popular rounds right now for startups that are performing: insider-lead financings. Many entrepreneurs want to keep burning cash, albeit at much lower rates, so as to continue investing in areas of the business. Existing investors know the business best. Instead of raising a big new round, they’re doing smaller inside rounds.

While there’s no timeline for return to normalcy, it feels like several more quarters of this. Today, it’s lean times and inside rounds for startups.