The LinkedIn take du jour on tech’s bruising 2022 is, of course, one of optimism.
The economic downturn will breed the next big tech successes — as crisis, optimists say, breeds opportunity.
In tech’s short history, we’ve seen how this sentiment might be true. The Great Recession of 2007-09 birthed billion-dollar companies such as Airbnb (founded in 2008) and Slack (founded in 2009).
So will 2023 and 2024 be the years the future Brian Cheskys and Stewart Butterfields emerge? Is now another “Airbnb moment”?
Hard times make more resilient founders
Many proponents of the “Airbnb theory” note that tough economic times steel founders to 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 while she admits her timing (both times!) may not have been spot on, the circumstances she found herself in certainly made her stronger.
A great company and great founder grow in any conditions
“You need ingenuity, courage and also the energy and the conviction to go against the mainstream,” she says, explaining that she left her stable job as an M&A and digital transformation consultant at Axel Springer to found her first company. “These are all things that make for a better founder.”
Founding in a crisis certainly makes you more cash efficient, resourceful and able to drill down on what customers actually need, adds Nettesheim: “If you can fulfil that need, and fulfil it well, there’s going to be some degree of willingness for (investors and customers) to pay for it.”
“A great company and great founder grow in any conditions,” says Tomasz Swieboda, an investor who worked at the central European fund Penta Investments in 2010.
Three years earlier, at the very start of the recession, Penta acquired Żabka, a chain of Polish convenience stores, which went on to be the leading player in convenience retail in the country. It grew EBITDA (earnings before interest, taxes, depreciation and amortisation) by 162% and opened almost 400 new stores — “all during the time of the global crisis”.
Fresh talent on the market
From a hiring perspective, now could well be the best time to try building a global tech giant.
Mass layoffs have meant that there is plenty of experienced tech talent flooding the market, which is good news for existing companies that previously struggled to hire seasoned professionals, says Claude Ritter, cofounder of Cavalry VC.
Big redundancies have also reduced salary expectations among candidates, meaning that even early-stage startups are in a better position to compete with big tech for top-tier talent.
Dmitry Samoylovskikh, a serial founder and angel investor, recently set up Uniborn — a Tallinn-based venture platform which has created a matching tool to connect laid off employees with business angels and VCs — based on his belief that mass layoffs at big tech companies would cause a surge of operators founding businesses 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 not do) when laying the groundwork for their startup,” says Samoylovskikh.
He adds that these operators have been sitting with their ideas for a while, and have already “thought through all aspects of their business model” and worked out possible problems.
Macroeconomic factors make it harder to build now
Still, there are plenty of reasons why the next Airbnb could be harder to create right now. Many investors say it’s actually more difficult to scale a successful company now than in the first decade of this century due to shifting macroeconomic factors.
“Back in 2007, we were simply dealing with a recession, even if it was the largest one since the 1930s,” says Swieboda. “Now, we're facing additional factors due to the results of the Covid pandemic and geopolitical issues like Russian aggression toward Ukraine. Founders have to take more factors into consideration,” he says.
Things are completely out of whack in terms of us being able to predict what's happening
Those factors include thinking about whether a company will have supply constraints in the next few years if China decides to annex Taiwan, says Cavalry VC’s cofounder Claude Ritter — “and those things, honestly, we’ve never thought about in the past,” he says. Ritter cofounded German food delivery giant Delivery Hero in 2011, when the world hadn't exactly recovered from the impact of the recession.
He adds that “things are completely out of whack in terms of us being able to predict what's happening”, and it’s hard to forecast which companies will thrive or fail.
A year ago, Cavalry’s portfolio company Nory, an operating system for the hospitality industry, had no trouble raising money, but trying to raise a Series A round this year has been tough, says Ritter.
Conversely, Patronus — another of Cavalry’s portfolio, which creates smartwatches to give elderly patients access to emergency help — set out to raise a €12m Series A this year, and raised €27m instead.
Interest rates are higher now
The second argument for it being harder to build a huge success like Slack or Airbnb relates to how interest rates impact the availability of capital for fast-growing tech companies.
At least some of Airbnb’s success in the face of a recession can be attributed to very low interest rates in the US at the time, says Cavalry’s Ritter. Central banks around the world at the time slashed interest rates to try and stimulate economic growth and investment.
“The interest rate drop was a massive tailwind for (Airbnb), because they were able to raise a ton of money at ever-increasing valuations for a very complicated business model that was very expensive to build,” he explains.
The environment is starkly different to now where interest rates have risen significantly — in the UK, interest rates are the highest they've been in 14 years. This has been bad news for founders looking to fundraise. Interest rate hikes have sent stocks down, hitting public tech companies and making VCs more cautious to invest.
High interest rates also affect demand: consumers are incentivised to save more and spend less, especially on products that are nice-to-have rather than essential, dampening demand for startups’ consumer products.
Just look at Gorillas. No one gives you money for those kinds of models today — and Airbnb is a similar one
“I don’t think you could start an Airbnb today because no one would give you money for two to three years to build that thing,” adds Ritter. “Just look at Gorillas. No one gives you money for those kinds of models today — and Airbnb is a similar one.”
And with VCs more focused on backing companies that can reach 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, might be passed over.
A romantic tale
While investors might be well-intended in telling budding entrepreneurs that now is the best time to found a company — and theirs could just be the next Airbnb — putting a romantic lens on the crisis is unhelpful, says Ritter.
It makes prospective founders unaware of the challenges of building, especially given that fundraising is realistically very tough.
Ritter predicts that a lot of “tourist founders” — those who want to play entrepreneur without having a substantial business model — will be swept away in the coming year as they won’t be able to raise money. Meanwhile, those working on ”relevant and impactful tech” in healthcare or climate will thrive.
Nettesheim agrees: “A crisis is the end of the founder-as-a-lifestyle phenomenon. Who can brag about how much cost they saved this week? And how many people got fired?
“Founding during crises is hard. It's nothing for the faint-hearted, nothing for those who are in it for money or status.”
Is the next big tech success out there?
All that said, milestone innovations have already emerged this year amid a tough funding environment: GPT-3, a technology using 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 Samoylovskikh.
“Just these two advancements 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 this shows that novel ideas and great companies can be built at any time. When founders feel compelled to launch a business — they’ll do it, regardless of the situation. Neither Ritter or Nettersheim paid attention to the economic environment when they founded their companies, they tell Sifted: they had ideas and just jumped right in.
So, is the next founder of Airbnb or Slack already among us? And will we see life-changing companies emerge in the coming years?
“Absolutely,” says Samoylovskikh. “Technology is developing at an exponential rate, so there will never be a lack of ideas. In fact, now is the ideal time to see the next big tech company put down roots.”