🌞Earlywork #74: An Operator's Guide to Navigating a Downturn
Bear market survival tips for tech & startup operators, from Albert Patajo
Ello ello Earlyworkers!
Dipping into your inbox is Earlywork #74, a weekly cheeky newsletter sharing insights into future-focused careers for the next generation of founders & operators.
In this week’s newsletter, community member Albert Patajo dives deep into the changing market conditions and what they mean for employees, investors and founders in tech & startups.
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For founders and investors, there has been an abundance of news, insights, articles and advice on the recent market downturn.
But for employees and operators in startups and tech companies, there’s limited guidance on what indicators to look out for and what you should be doing to prepare.
This has created an information asymmetry on what operators should be looking out for, as often, they’re the ones who pay the biggest price during these periods of uncertainty.
If you’re a tech employee, here’s a guide to help you understand what the f*ck is happening in the market and the information you should focus on.
The TL;DR 👀
Each company is in a unique position. You should assess for key indicators like hiring and growth to determine the impact the market is having on your company. We’re in a market downturn but that shouldn’t necessarily alarm you.
Investment is tightening, but good companies will still get funded. Seek transparency to understand how the market is influencing your company’s ability to raise funding and any equity/options you might own.
If the worst happens, you should focus on your own wellbeing and make sure you’re okay. There’s an abundance of resources available to help you get through anything!
A Perfect Storm for Growth 📈
Over 2020-21, a perfect storm hit the tech ecosystem.
The remote transformation arising from the pandemic, combined with the historically low interest rates, created an environment that catalysed record-breaking fundraising activity.
In Australia, we saw over $10B of investment in startups in 2021, representing a 3.2X increase from the year before 🤯
This trend was matched in public markets, with big tech valuations booming as low interest rates fuelled capital towards high-growth companies. Revenue multiples expanded to upwards of 50-100X and we saw all-time highs for almost all listed tech companies.
But a New Storm is Coming… 🌬️
Since late last year, we’ve entered a contraction in the market.
Economic conditions have started changing and a second storm has hit the tech ecosystem, sending the market into a downward fall. The macro-environment and market sentiment is being shifted by:
Rising interest rates
The war in Ukraine
Supply chain and talent shortages
Lingering effects of the pandemic
Tech has been hit particularly hard. Public market valuations have dropped, revenue multiples have contracted and many companies are now trading at below their pre-COVID levels. Some companies like Roblox and Coinbase are even trading below their IPO prices.
The impact isn’t isolated to the public markets either. We’ve seen ‘down rounds’ starting to happen as startups are now raising at a valuation lower than their previous valuations from 2020-21. Earlier this year, Instacart’s valuation was cut by 40% and more down rounds are expected to follow this year.
VC and hedge funds are also experiencing the pain of the tech contraction. Major global hedge fund and venture investor, Tiger Global, announced they had lost over $17bn as a result of the market, removing 2/3 of its gains since 2001.
All these numbers have a real human impact, as companies undergo a wave of layoffs to save cash for weathering rougher economic conditions.
Just weeks ago, the BNPL giant Klarna laid off ~10% off their staff (700 employees) and last week, crypto on-ramp, Coinbase (which grew revenue 6X over FY20-FY21), laid off ~18% of its employees (~1,000 employees).
So what about Australia?
We’ve already started to see funding activity slow locally as investors tighten their wallets and capital shifts away from public market tech. US investment giant and Canva investor, Franklin Templeton has marked down the value of its Canva investment and 15-minute grocery app Send recently filed for voluntary administration.
And unfortunately, layoffs have started to occur in the Australian market too. Brighte, the solar energy fintech, has let 15% of its staff go this week.
While Australia can sometimes be shielded due to our smaller stature, this may be a sign of things to come.
Should I Be Worried? 🤔
There’s probably no need for immediate worry. Each company will be in a unique operating situation so forecasting doom and gloom may not be an accurate portrayal of your working environment.
However, there are a few things you can do in order to stay informed about the changing market conditions and how it could impact your role:
Read the News! 🗞️
Reading the news helps you stay abreast of the latest market conditions, particularly in tech but more broadly around the world.
Startups don’t live in a bubble and are impacted by macro changes in the environment including changing interest rates, the war in Ukraine, climate change, talent shortages and so forth.
The news is a great source to understand the leading indicators that will impact the technology ecosystem.
In Australia, some great outlets to check out are:
The Australian Financial Review
Earlywork #news-room channel!
And if you’re after international news:
TechCrunch and Geekwire are great for tech reporting
Wall Street Journal and The New York Times for more general economic news
Ask Leadership for Transparency 🙋🏽♂️
The founders and management team in your company will be in the best position to inform you and other operators as to how the market has impacted the company.
If you have equity or options, it’s even more important you’re across the financial health of the company as this could impact the value of your equity and the timings of potential exits.
Great founders may have already addressed concerns upfront but if they haven’t, key questions you should be asking include:
How much runway do we have?
Are we looking to raise?
How will this impact our growth plans?
Have our internal expectations changed?
Assess Hiring Activity 🤝
In typical market conditions, startups are almost always hiring, particularly if they’re well-funded or are growing rapidly.
Checking the number of open roles on the company’s Linkedin page or website is a good indicator of the health of the company.
If there’s a hiring freeze or reduction in open roles, then it's a sign that the company might be conserving runway, but if hiring is full-steam ahead, that may be a great sign that the company is healthy and still has a strong appetite for growth.
It’s worth contextualising hiring to the stage of the company. If you’re at a smaller company (<30 employees) there might not be many roles open to begin with, however, at larger companies (>100 employees), assessing hiring is a great way to gauge company health.
Scan the VC Landscape 💰
Look externally at the VCs and investors in the country to keep a pulse on whether they’re still investing (spoiler alert: they are). VC activity is a good indicator of market sentiment.
In 2021, VC activity soared, with many of the major funds in Australia raising and deploying large amounts of capital in the ecosystem.
These funds will need to be deployed so there is still money available for startups, particularly startups with strong unit economics and capital efficiency.
If the company you’re in has raised venture capital, consider the timing of the last round and how that might play into a raise in the near future.
Watch for Market Consolidation 🛒
In down markets, there is often an increase in mergers and acquisitions (M&A) activity as well-capitalised companies acquire other players in order to gain access to intellectual property, snap up employees, and expand into other markets.
We’ve started to see some M&A in the Australian startup scene already this year and we may continue to see more as companies take advantage of the changes in the funding market.
Keep your eyes peeled on other companies in your lane, as competitors may acquire other companies or even your company in order to expand and scale.
Overall, the shift in market conditions shouldn’t be a cause for alarm. Markets operate in cycles and great companies have emerged during financial down-turns.
The best way to equip yourself during a downturn is to focus on the job at hand and execute efficiently in your role while staying informed.
What Happens if I Lose My Job? 😬
If you’re reading this and you’ve lost your job, you should know that everything is going to work out!
In the unlikely event that you’ve been let go, there are a number of avenues available but first and foremost, you should take the time to make sure you’re looking after yourself. BeyondBlue and Headspace both have a great set of resources to help!
When you’re ready to start the job hunt, reach out to former colleagues, managers, founders and even the investors who funded your last company.
They might be able to introduce you to other companies who may be hiring or even support you to transition into starting your own company using the experience you have as an operator.
If you have unexercised options, then you may also need to consider whether it’s worth exercising these options. Some ESOPs allow for employees unlimited time to determine when they can exercise their options, while other ESOPs stipulate a specific timeframe for you to exercise your options.
If you’re considering exercising options, you should consider your own financial stability, the financial health of the company and its long-term outlook.
The most important thing, however, is to look after yourself and to know that this is temporary and the right opportunity will present itself!
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