The startup growth paradox

2020 and 2021 was flush with speculative enthusiasm in the startup world. Scaleups all over the world raised historical funding rounds with extremely high valuations thanks to the market being pumped with conjectural capital.

And then 2022 arrived.

The market has crashed, we’re in the middle of a war, the pandemic is showing no signs of stopping, large tech companies are laying off employees in droves and investors are more circumspect than ever.

The highs of 2020/21 has now quickly given way to a downward market spiral in 2022, and we’re most certainly heading towards a global recession.

The result?

Most startups that raised capital in outsized rounds in 2020/2021 find themselves in a pickle.

Naturally when these startups raised funds in 2021/2022, ambitious growth and hiring targets were set owing to the fresh influx of cash. That inevitably led to high burn rates stretching to the end of 2021.

Usually this is not that big a problem if the startups we’re talking about have enough runway to get them through 2022.

However, many startups set extremely ambitious growth targets and now barely have enough cash to get them through 2022. And all of a sudden, they need to raise funds again.

So what options do they have? They could either grow slowly and save cash or continue growing at the expense of cash. The problem?

Neither option is easy to pursue.

Those startups that raised in 2020/21, now face a potential next-round valuation that does not meet their expectations.

They could limit growth in order to conserve cash. But this will affect their growth rate and by association their equity value, which would in turn limit fundraising options.

On the other hand, startups that choose to continue growing at the expense of high burn rates, would now have an even smaller runway sending a negative signal to investors that value profitability and long-term viability of a business.

This forms the crux of the startup growth paradox. Both options are high risk strategies and could turn investor sentiment against the startups in question.