unicorns: Wake up and smell the coffee valuation: Why startups need to buckle up, hunker down

Masayoshi Son, founder of SoftBank, lent his voice to a chorus of venture capitalists over a long winter of funding for startups. The 2021 party, which produced more unicorns than the sum of the previous five years, seems well and truly over.

SoftBank reported its biggest quarterly loss in April-June and cut investments to $600 million from $20.6 billion in the same period a year ago. The tightening of the global credit market is causing retail investors to reassess risk as the appetite for listing in the market wanes.

Valuations of startups before raising new capital from investors have fallen from the previous three months, and there is an upward trend for companies to take a downward turn, valuing them lower than previous ones. Founders unwilling to accept this new reality could be heading for a long dry spell, according to Son.

A funding drought is expected to push startups to adjust their strategy where hyperscaling gives way to sustainable business models as investors seek a clearer path to profitability. Companies will need to design, engineer and manufacture products that can withstand downturns by delivering lasting value to customers. And it needs to be accomplished efficiently, without blowing big budgets.

Rotating the talent pool during a turbulent phase allows companies to improve hiring outcomes at not much greater cost. The crisis is also an opportunity to invest in innovation, which then becomes a real differentiator and gives investors a vision to take ownership of. Marketing and customer management are also expected to take up more of the management bandwidth of startups.

These are all regular prescriptions that gain intensity as the environment deteriorates. However, startup founders will primarily need to realize that they are governed by a uniform set of business rules. These rules do not allow for stratospheric valuations that make headlines for long periods of time. The era of easy money is over. Investors have woken up and smell of coffee. It’s time for startup founders to do the same.

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