Unsexy, Overlooked Startups Are Poised To Thrive In The Downturn

By Prashant Fonseka 

This summer has been stressful for investors and entrepreneurs alike. The market adjustment that’s happening in equities, especially tech, and crypto is having a material impact on investing in and building technology businesses.

Valuations have already come down significantly. It is much more difficult for most companies to raise money. It is harder to get a job for someone who wants to work at a tech company, and it’s harder for fund managers to raise capital. It seems like everything is harder, and it may be the case in the near-term for most, but there is a bright side.

Many investors I’ve spoken to recently, despite their exasperation, see what is happening now as a much-needed correction. In bull markets, there’s a lot of noise. Valuations operate like a game of hot potato, and a company’s ability to fundraise becomes largely divorced from business progress. Many investors and entrepreneurs become extremely wealthy during a bull cycle, but often at the expense of the entrepreneurs building the less flashy, but more substantive, businesses. Many unsexy businesses, such as accounting and logistics, struggled to fundraise relative to their peers during the bull cycle, but now are in the spotlight as investors resort to betting on business fundamentals.

What’s hot

Unsexy is the new sexy. Margins, organic growth and capital efficiency are once more the key virtues of entrepreneurship, from the perspective of the VC community. Valuations may be lower, but the entrepreneurs building real businesses can now get the undivided attention of investors.

Many of those unsexy companies have lower valuation watermarks than SaaS businesses and are thus prime targets in the current environment. I’ve already seen in the recent months that investors have become more willing to dig into Excel spreadsheets to understand complex business models. With less noise comes more focus. For companies that have money or can still raise, opportunities abound.

While tech labor markets are still in shock, and many may find the prospect of leaving big tech to join a startup riskier, the net effect should be a more favorable hiring market for entrepreneurs.

Many currently at startups want to stay at startups, and the sad but healthy reality is that many startups that have failed to find product-market fit won’t be able to continue on indefinitely. The companies that start modest but have room to grow into huge markets will have an easier time hiring from the flash in the pan companies that raised too much.

Now is the time to build.

The tremendous amounts of capital that were raised during the bull cycle must be deployed over the next few years. Investors are now more judicious, which benefits a certain type of company and will be challenging for others. For those who are heads down building real businesses, now is the time to thrive.

 Prashant Fonseka is a partner at Tuesday Capital, an early-stage, sector-agnostic venture capital firm that has made hundreds of investments over the last eight years, backing many startups that have gone on to be Silicon Valley standouts and household names, including Airtable, Airbnb, Uber, Cruise and others. He previously wrote for Crunchbase News on pitch pointers.

Illustration: Dom Guzman

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