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The startup slump may be a blessing in disguise

Startupland is about to experience its first downturn since the 2008 recession. I realized today that many founders and startup employees were literal children when they last had to live through a bear market: for thirteen straight years, tech companies have been growing and growing. They’ve never seen or had to prepare for a slump.

It was a startling realization: to me, that feels like yesterday. (I’m older than I think I am.) I was at the tail end of my first startup at the time. We’d taken investment but had been cashflow positive for years first; because we were insulated from the worst of it, I had a panic-free front row seat. For a little while, funding dried up. Services consolidated or went away entirely. And in the meantime, free and open source projects - WordPress in particular - thrived.

The introduction of the iPhone catalyzed the consumer tech industry out of its trough. Rather than carrying on with business as usual, the companies that did well in 2009 were the ones who took advantage of the new always-on internet to create new kinds of services. They were differentiated from the failed dotcoms that came before: services like Flickr gave way to apps like Instagram. It was a genuinely new way of thinking. For a little while, even Facebook struggled to get to grips with the new web.

This week, Y Combinator sent a strongly-worded note to its portfolio of startups:

Regardless of your ability to fundraise, it’s your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.

For a generation of startups used to spending money with wild abandon, partially because investors have implicitly encouraged the strategy of using capital as a moat, pivoting to business fundamentals may be too difficult. Even if founders can pivot their strategies, many of their employees were lured by lifestyle perks and the prestige of working for a growing company with name recognition in the community. If the startup hasn’t worked on a deeply-held reason to work there - something that makes the work meaningful; a nurturing community of people that values them as people - founders may find that retention is harder than they would like.

Still, I don’t think there’s any other way out. While the 2008 slump happened to coincide with the iPhone, I don’t see a similar paradigm shift coming for tech this time round. Crypto has already crashed, and although it will probably rebound, investment there has slowed. The metaverse is vaporware at best. The promise of an ambient web powered by augmented reality devices is years away.

So the biggest paradigm shift may simply be a return to reality: a vibe shift to profit. Valuations will be calculated based on revenue rather than hype. Some companies will make it; many more won’t.

In a world driven by revenue, the way to survive is to provide a service that people find valuable enough to pay for, aligned with their needs and interests.

Almost by definition, many of the companies that won’t make it through leaner times are the greediest: the startups created to feed their founders’ desire to make money rather than to deeply serve their customers or overhaul a predatory industry. Their coin-operated philosophies often extend to treating their employees like fungible resources who should be grateful to work there. I don’t think I’ll spend much time crying over them.

On the other hand, I’m excited for the companies who can double down on their customers and on their employees. The founders who can create real value for the people they’re trying to serve, and curate an empathetic community of thoughtful builders to do so, are the ones who are most likely to win. That’s what the tech industry is at its best, and that’s what will survive.

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Email: ben@werd.io

Twitter: @benwerd

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