Hey I think the music stopped
Hi all —
Spicy post incoming. The startup game as we’ve known it for the past ~10 years is changing. It’s not just SVB, but SVB didn’t help.
Good freakin’ riddance to the old world
On the surface, things might seem to just have “gotten less crazy.”
Is software still going to eat the world? Definitely.
Can you still raise a seed round? Sure.
Can you still raise a Series A? Of course.
Can you pull a “Breslow,” where you YOLO massive stories about how you’re going to change the world with little-to-no revenue proof, raise FOMO rounds at ridiculous valuations while selling off tens of millions in stock secondaries, then “step up into a chairman role?”
I hope not.
The 2010s funding environment selected for founders with a certain kind of - je ne sais quoi - fraudulent narcissism. What mattered was telling a messianic story rather than building a *real* business. Talk to employees at “hip” companies who know what’s up, and they generally have the same story: “Yeah, the founder is a psychotic dingo, and the business kinda works despite him/her.”
Now all those employees have underwater stock options after making a dingo founder rich… and they’re rightfully pissed.
Everyone hopes that the post-insanity funding environment selects for thoughtful leaders tackling interesting problems. Where founders need to be disciplined and effective operators who understands things like “revenue” and “CAC payback period” and maybe even “burn multiple.”
But this take misses a bigger point.
We’re playing a new game
Three really important things the startup community depended on in the 2010s are dying.
#1: The 2010s fundraising path is f*cked
I won’t bore you with the math, but the summary is: When interest rates are persistently high, tech stocks get crushed. When tech stocks get crushed, late-stage investors get crushed and have to rethink valuations. When that happens, early-stage investors get crushed and have to rethink valuations. When that happens, your next term sheet punches you in the teeth.
Since 2008, we’ve lived in a world with low interest rates and soaring tech stocks. No more. This means your “SaaS Napkin” valuation math takes a totally different (and less fun) shape. Want to own 20% of your company after Series A? Good luck.
Oh, and exits aren’t great now, either.
Want to exit to a tech behemoth at an absurd valuation? They’re getting pummeled, sorry. Plus, antitrust stuff. That door’s kinda closed.
Think that private equity fund will give you a smooth exit? Those sharks will eat you alive.
But Rob, isn’t there a ton of VC “dry powder” out there waiting to be invested?
Maybe, but that’s not relevant. The market as a whole is shitting itself while trying to grapple with the high-interest-rate world. Everyone’s current funds’ returns are getting hosed, and investors are shell-shocked. VCs have to fundraise too, and you think that’s going to be easy when most of their paper returns are dying with a whimper?
In the past, this kind of high-interest rate, conservative environment has meant more dilutive financings, tougher investment terms, and founders getting ritualistically beheaded and replaced with professional CEOs. All of these things will come back into fashion at some point, and in the meantime there will be months or years of nail-biting and hesitance from VCs who spend their waking hours watching Twitter to figure out how they should think and act.
Even if you’re a good company with solid fundamentals, you might not be able to raise on terms you can stomach. “Top 1%” companies will even have trouble, and everyone will have to think a lot harder about raising on terms that don’t screw them over next round.
Again: The 2010s fundraising path is f*cked.
#2: The 2010s beachhead tech buyers are f*cked
To generalize, in the 2010s we largely approached B2B software GTM as: “Hey, let’s sell these tools to startups and software companies, let’s invest a ton of money in fancy things like PLG and marketing, and as those companies hire a bunch of employees we’ll grow like wildfire.”
This approach has been getting more difficult. If you’ve tried selling into SaaS companies, you know how annoying and jaded tech buyers are:
“Isn’t this just a set of workflows on top of APIs with a database and a fancy UI? I can just hack this together myself.”
“I’ve looked at every website in your category on G2 and here’s my buying criteria, please send back how you perform on each of these 117 metrics. I will pay $7 / month.”
“Oh if you’re not out of YC, backed by a16z, with a hipster website that’s identical to all other hip startups, I’m not interested.”
“You sent me your calendar link first? You MONSTER”
PLUS - more important than tech buyers being dingos - tech buyers are f*cked (see Rule #1). They approached hiring like I approach Cici’s Pizza - all-consuming gluttony, zero restraint, boxing competitors out at the buffet line.
Buffet-style hiring meant infinite seat expansion and 150%+ net dollar retention for SaaS startups. That’s mostly over.
Blame Elon for making Twitter a workplace that requires work. Blame Zuck for realizing that Meta needs exactly 17 neckbeards to operate. Blame Big Tech PMs on TikTok who showed the world that the Big Tech Product Manager role is like consulting without the workload: Naval-gazing meetings and free food. Or blame Jerome Powell, Donald Trump, and Joe Biden.
(If you ask me, this all comes down to the Bills losing to the Bengals in the AFC Divisional Round. WHERE WAS THE OFFENSIVE LINE??)
The point: Tech businesses and startups have to be real businesses now. Which means the traditional beachhead customer for cool startups = f*cked.
#3: The 2010s approach to GTM is f*cked
Over the past 10 years, startups spent so much money on so many different customer acquisition channels that it’s not clear they actually know how their customer acquisition engine works - what generates happy customers, profitably?
It’s like the old saying, just worse: “I’m wasting 90% of my GTM spend, but can’t figure out which 10% actually works.”
Massive sales teams with dismal quota attainment. Insane marketing spend. “Product led growth” that found a way to 10x BOTH marketing & product’s budgets in order to increase the conversion rate from 22% to 22.23% on an onboarding flow that features a 96-month CAC payback. Don’t even get me started on CAC accounting shenanigans designed to LARP GTM efficiency.
As a result, we have a generation of “GTM experts” who don’t know if they know anything. (*Author looks in mirror, desperately holds off existential crisis*)
This is the natural outcome of “growth of all costs,” and the problem is: Does anyone know how to grow when money isn’t free?
Like the early 2000s, but maybe worse?
Important caveat: My experience in software in the early 2000s was limited to a computer game called Fatty Bear. I was 10.
So no, I have no firsthand knowledge of what it was like to sell software in 2003.
But think about it: What’s different between then and now?
It’s easier (and cooler) to build software today than it was in 2003. Which is why every “industry map” in software looks like this:
And most industries have already gone online, so the boilerplate “digitization ROI” ain’t as easy to sell as it might have been twenty years ago. The days of obvious, low-hanging fruit from “taking things on paper and moving them online” isn’t a thing in most industries.
The point: The internet is massive, and there’s always a niche, BUT most buyers are overwhelmed with sales outreach and advertising options. Don’t believe me? Ask a VP of Sales how many emails they’ve gotten in the past 24 hours about some new “Sales AI tool.”
Where we’re headed
When valuation paths, beachhead buyers, and GTM motions blow up, what happens?
It’s not enough to say companies will prioritize profitability and cash flow. That’s obvious.
I think four big things are going to change:
Who we sell to
What we sell
How we sell
How we approach product development
Who we sell to
Selling to hip tech startups and software companies ain’t easy, and hopefully it will become less cool in the coming years.
I want to sell to carpet companies. To pavement asset management companies. To ball bearing manufacturers.
This would be a good change for the world. Founders are going to realize that when selling outside Silicon Valley:
Buyers are genuinely appreciative that you’re trying to serve them.
You know those productivity gains we’re supposed to be delivering as a way to move the world forward? Bringing thousands of machine shops into the internet age is a great way to do that.
What we sell
Buyers don’t just buy software products, and never have. Buyers buy EXPECTATIONS, and products are just a means to deliver on those expectations. (Shoutout, Clay Christensen + Bob Moesta on “Jobs to be Done.”)
Since the movie The Social Network came out, the startup world has been obsessed with tech products that “just take off.” Which means we vastly overinvest in our software products relative to their importance to buyers, and underinvest in things that buyers actually value.
We’re going to see this change, led by companies who realize they can sell higher-level “jobs to be done” with software-services combinations, and/or with courses and education offerings.
This is going to have additional benefits: Buyers are willing to pay much more for things they perceive to be services than they do for products. And educational offerings like courses are generally easier to buy than software. (Nobody’s ever asked: “Does this course integrate with my payroll system?”) Plus, courses and services seem to create better buyers.
By broadening the aperture on “what we sell”, we’re going to see diverse offerings from tech companies. This will create a clearer path towards profitability than trying to do cartwheels with Product-Led Growth to make the economics work on a $250 ACV software purchase.
Nice option for companies who *don’t want to raise and get punched in the teeth with valuations.*
How we sell
In short - founders are going to have to go back to the days of being good at Go-To-Market, rather than being generalist management types who “build the systems and processes for scale.” I have heard this phrase a lot, and I just assume it means, “watch TED Talks and eat Bagel Bites.” (Authors note: Pizza Rolls > Bagel Bites.)
I’ve spent a lot of time in the past months digging into marketing and sales, and my hunch is that founders who do this will realize just how much nonsense there is - and just how much can be improved and automated.
As we play around with GTM, we’re going to have to find creative ways to *not* have expensive sales teams and the traditional “Discovery → Demo → Pray” process that Salesforce built and we all just kinda said, “well if it works for them…”
We’ll also realize that the PLG approach in most cases makes no sense in a world where *cashflow* matters more than growth.
We might see things like - “Purchase course → Purchase service → Purchase product” or something much more cash-efficient.
How we approach product development
Back in the stone ages, the concept of the “Mythical Man-Month” came out. It basically said that “adding developers to a late project only makes the project later.”
There’s a broader point about product development that most people don’t understand: It has diseconomies of scale. A 5-person team is WILDLY more productive than a 15-person team on *any metric*.
Microsoft Word for Windows was built with a team of less than 10 people. Roller Coaster Tycoon (unclear about Fatty Bear) was built by one person. We’re going back to that age, which requires real trade-offs - like treating developers as if they’re adults AND CAPABLE OF TALKING TO CUSTOMERS, for example.
The opposite of this has led to complication that compounds:
We hire a big team
The big team slowly makes a product that can only be maintained by a bigger team
The bigger team makes new things that can only be maintained by a bigger team
Someone shouts “technical debt”, “OKRs,” and/or “I read an article about how CNN builds product” and you wake up with a 40-person engineering team that accomplishes nothing.
End of rant. Welcome to the new world and good luck, dear founder. This world will select for founders who are both thoughtful AND execution-focused, please act accordingly.