The LinkedIn take of the day on technology bruises 2022 is, of course, a year of optimism.
The economic downturn will breed the next big tech hits — like crisis, optimists say, breeds opportunity.
In the short history of technology, we’ve seen how that sentiment could be true. The Great Recession of 2007-09 spawned billion-dollar companies like Airbnb (founded in 2008) and Slack (founded in 2009).
So, will 2023 and 2024 be the years when the future Brian Cheskys and Stewart Butterfields emerge? Is now another “Airbnb moment”?
Tough Times Make Founders More Resilient
Many proponents of the “Airbnb theory” note that tough economic times crash into hardship, making them more resilient.
Katja Nettesheim founded her first company – a business consultancy called Mediate – during the Great Recession and her second – an e-learning company for teams named Culcha – at the start of Covid, and although she admits that her timing (both times!) can’t have been spot on, the circumstances she found herself in certainly made her stronger.
“A great company and a great founder who grows in all conditions”
“It takes ingenuity, courage but also energy and conviction to go against the tide,” she says, explaining that she left her stable job as an M&A and digital transformation consultant at Axel. Springer to found his first company. “These are all things that make a better founder.”
Founding in times of crisis certainly makes you more cash efficient, more resourceful and able to figure out what customers really need, adds Nettesheim: “If you can meet that need and meet it well, there will be a certain degree of willingness for (investors and customers) to pay for it.
“A great company and a great founder thrive in all conditions,” says Tomasz Swieboda, an investor who worked at Central European fund Penta Investments in 2010.
Three years earlier, at the very start of the recession, Penta acquired Żabka, a Polish convenience store chain, which has become the leading convenience store player in the country. It increased its EBITDA (earnings before interest, tax, depreciation and amortization) by 162% and opened nearly 400 new stores – “all during the global crisis”.
New talents on the market
From a hiring perspective, now might just be the best time to try to build a global tech giant.
The massive layoffs have meant there’s a lot of experienced tech talent flooding the market, which is good news for businesses that previously struggled to hire seasoned professionals, says Claude Ritter, co-founder of Cavalry VC.
The big layoffs have also lowered candidates’ salary expectations, meaning even early-stage startups are better positioned to compete. compete with big tech for top talent.
Dmitry Samoylovskikh, serial founder and angel investor, recently established Uniborn, a venture capital platform based in Tallinn who created a corresponding to tool to connect laid-off employees with business angels and VCs — based on his belief that mass layoffs at big tech companies would lead to a wave of operators founding companies in the coming years.
“Many have seen how unicorns are built from the inside, so they have a different perspective and insider knowledge of what to do (and what not to do) when laying the groundwork for their startup,” says Samoilovskikh.
He adds that these operators have sat with their ideas for a while and have already “thought through all aspects of their business model” and worked out any issues..
Macroeconomic factors make construction more difficult now
Still, there are plenty of reasons why the next Airbnb might be harder to build right now. Many investors argue that it is actually harder to scale a successful business today than it was in the first decade of this century due to changing macroeconomic factors.
“In 2007, we were just facing a recession, even though it was the biggest since the 1930s,” explains Swieboda. “Now we face additional factors due to the results of the Covid pandemic and geopolitical issues like Russian aggression against Ukraine. Founders need to consider more factors,” he says.
“Tthings are completely out of whack when it comes to our ability to predict what is happening”
These factors include thinking about whether a company will face supply constraints in the next few years if China decides to annex Taiwan, says Cavalry VC co-founder Claude Ritter – “and those things, honestly, we never thought about in the past,” he says. Ritter co-founded German food delivery giant Delivery Hero in 2011, when the world hadn’t exactly recovered from the impact of the recession.
He adds that “tThings are completely out of balance when it comes to our ability to predict what’s going on,” and it’s hard to predict which businesses will thrive or fail.
A year ago, Cavalry’s holding company Nory, an operating system for the hospitality industry, had no trouble raising funds, but trying to raise a Series A round this year has been difficult, says Ritter.
Conversely, Patronus – another Cavalry portfolio, which creates smartwatches to give elderly patients access to emergency aid – set out to raise a Series A of €12 million this year, and lifted €27 million instead.
Interest rates are higher now
The second argument for the difficulty of building a huge success like Slack or Airbnb concerns the impact of interest rates on the availability of capital for fast-growing tech companies.
At least part of Airbnb’s success in the face of the recession can be attributed to very low interest rates in the United States at the time, says Cavalry’s Ritter. Central banks around the world at the time cut interest rates in an attempt to stimulate economic growth and investment.
“The drop in interest rates was a huge tailwind for (Airbnb) because they were able to raise a ton of money at ever-increasing valuations for a very complicated and very expensive business model to build,” explains- he.
The environment is radically different from where interest rates have risen dramatically – in the UK interest rates are the highest they have ever been 14 years old. This has been bad news for founders looking to raise funds. Interest rate hikes have driven stocks lower, hitting public tech companies and making VCs more cautious to invest.
High interest rates also affect demand: consumers are incentivized to save more and spend less, especially on products that are nice to have rather than essentials, dampening demand for consumer products from startups.
“Just look at the gorillas. Nobody gives you money for these kinds of models today – and Airbnb is similar”
“I don’t think you could start an Airbnb today because nobody would give you money for two to three years to build this thing,” adds Ritter. “Just look at the gorillas. Nobody gives you money for these kinds of models today – and Airbnb is similar.
And with VCs more focused on supporting companies that can achieve profitability – rather than those that simply want to grow as quickly as possible – some truly visionary ideas, which often take a few years to find exactly the right business model, could be ignored.
A romantic tale
While investors might be well-meaning in telling budding entrepreneurs that now is the best time to start a business — and theirs might be the next Airbnb — putting a romantic perspective on the crisis doesn’t help, says Ritter. .
This makes future founders unaware of the challenges of building, especially since fundraising is realistic very difficult.
Ritter predicts that many “tourism founders” – those who want to play entrepreneurs without having a substantial business model – will be swept away in the coming year because they cannot raise funds. Meanwhile, those working on “relevant and impactful technologies” in health or climate will thrive.
Nettesheim agrees: “A crisis is the end of the phenomenon of the founder as a way of life. Who can brag about the cost he saved this week? And how many people were fired?
“Founding during crises is difficult. It’s nothing for the faint-hearted, nothing for those in it for the money or the status.
Is the next big tech hit out there?
That said, some notable innovations have already emerged this year in a challenging funding environment: GPT-3, a technology that uses deep learning to create human-like text, and the announcement of the National Ignition Facility’s first-ever breakeven nuclear fusion reaction, according to Uniborn’s Samoilovskikh.
“These two breakthroughs alone could spark hundreds of new tech startups, and the potential for the ‘next big thing’ could easily be found in any of them,” he says.
Perhaps it shows that new ideas and great companies can be created at any time. When founders feel compelled to start a business, they will, no matter what. Neither Ritter nor Nettersheim paid attention to the economic environment when they founded their companies, they tell Sifted: they had ideas and went for it.
So, is the next founder of Airbnb or Slack already among us? And will we see life-changing businesses emerge in the years to come?
“Absolutely”, says Samoilovskikh. “Technology is developing at an exponential rate, so there will never be a shortage of ideas. In fact, now is the perfect time to see the next big tech company take hold.
Miriam Partington is Sifted’s DACH correspondent. It also covers the future of work, co-authors Sifted Startup Life Newsletter and tweets from @mparts_
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