Tech startups love to depict their success as the survival of the fittest. But even the weakest member of a species can survive in a bountiful environment. Now, as funding dries up and business conditions get harsh, startup adviser Sam Wong says founders must hone new skills—or perish.
To illustrate his point, he turns to a 19th-century short story by Rudyard Kipling called “Rikki-Tikki-Tavi,” in which a mongoose refrains from eating a full meal so as to preserve its strength and agility.
The same lesson applies to startups. “There is some value to staying hungry instead of feeling comfortable like a fat cat,” Wong, the author of the book 21 Secrets of Successful Startups, told Fortune.
“The test of a good company is not ‘Can I get continually increasing valuations and more rounds of funding in 2020 and 2021?’, because everybody was. It was much, much easier,” Wong said. “The measure of a good company is, how do you survive when it’s hard?”
It’s a test founders throughout Silicon Valley are bracing for. Funding that once flowed freely through Silicon Valley has slowed sharply, as interest rates jump and the war in Ukraine rattles the markets.
Once-high-flying startups like GoPuff, Patreon, and Instacart have seen their valuations take a tumble from their pandemic peaks. And companies like Snyk, Patreon, and Twilio have laid off staff to cut costs.
Wong, who has worked at several startups over the past two decades including Cloupia, a data center management firm that was acquired by Cisco, recently spoke to anxious startup employees at a San Francisco conference organized by the tech site TechCrunch. He shared some of his advice for startups in a later conversation with Fortune.
According to Wong, startups need to develop a robust financial model that can be adjusted for different economic conditions. He suggests four levels: aggressive, moderate, conservative, and disastrous.
“Most founders only create a financial model to fill in a required slide on their pitch deck. Once they’ve raised funds, they never look at the model again,” Wong said. “Smart founders know to leverage the financial model proactively.”
And at a time when companies are laying off staff, Wong says, focusing on having the right team in place is especially important. A great talent strategy leads to great teams, which drives great execution, which results in a fundable company.
“Everybody pays lip service to the team aspect; very few people invest in it,” Wong said. “I have seen great startup ideas with mediocre teams fail, and I’ve seen mediocre companies with fantastic teams succeed.”
Thinning out the noise
A Silicon Valley trope, originating from the last global recession in 2008, is that the best startups are founded in a recession. Airbnb and Square are commonly hailed as the pinnacle of innovation in a downturn because the battle-hardened startups were nimble enough to survive the last economic crash.
Optimistic venture capitalists frequently repeat this adage; yet it may be more wishful thinking than reality. Yes, there is some truth that with great turmoil comes great opportunity, but Wong says that doesn’t mean the company is doing something revolutionary.
“It just might be that’s because there’s less competition,” Wong said. “And the companies that are strong and are going to make it just stand out more because the crowd is thinner. Do I necessarily think that a recession creates great companies? No, it just thins out the noise.”
Evidence of the uprooting is already easy to find. One-click-checkout startup Fast was a particularly good example of a company that spent cash “like drunken sailors” and ultimately had to shut down in April. Another instance is electric car manufacturer Canoo, which went public in late 2020, stating in May that it had “substantial doubt” about its capacity to continue operating.
According to Wong, this is a necessary market correction. The companies that burned through their cash and failed to prepare for the downturn are going to be weeded out, he warns. Those who fail to prepare for the worst-case scenario, and don’t conserve cash as diligently as possible using thorough financial models, likely will not survive the downturn either.
“In the venture community, it’s been three to five years of wild exuberance,” Wong said. “I think having a correction like this is good. Hopefully, founders will realize that it’s not just about closing the next term sheet. It’s about building a great company.”