There is still lots to feel positive about.
First, businesses continue to move to the Cloud and this is not a trend that is going away any time soon. The Cloud sector represents around 30% of the total software industry so there is still a very large untapped market to go after. Cloud is growing by more than 20% a year and is expected to enjoy 70% market share of a trillion dollar market by 2027. Awash with easy money and further propelled by Covid, the market clearly got way ahead of itself. But the growth and the opportunities are still there.
Second, a recession is a great time to build a company. Costs are down, talent is more available and many of your competitors will be weakened or even go out of business altogether. Many of the most successful companies were started in challenging times including Amazon, Salesforce and Google in 2000 and Uber, Stripe and Airbnb in 2008/9.
The likelihood is that in 2023, and for the foreseeable future, those funding rounds will be smaller and at lower valuations than what we have seen over the last couple of years. This will include downrounds, flat rounds and rounds with more structure included.
At the same time, companies will need to be more focused on efficiency than in the past. Metrics that will be closely watched are CAC payback, NRR, gross margin and burn multiple. Investors still want to see growth but would rather see 2x growth with efficiency as opposed to 3x growth with high burn.
Although it might not feel like it, market corrections are healthy and necessary. The situation we found ourselves in was artificial and unsustainable. Too much money, too many companies, spiralling costs and not enough market to go around.
Companies will need to be leaner and more resilient if they are to survive and prosper. They will need to question every investment they make in terms of its impact to the business and the customer. But ultimately this creates stronger and more enduring businesses. And that’s what we all want to see.
