Barcelona — Innovative and emerging companies, both startups and those with more mature products or services, called ‘scaleups’, are facing a challenging year, due to mass layoffs in the tech sector, which are taking place on a global scale, and amid higher interest rates, high inflation and lower demand, all of which will lead to less available funding.
As investors step on the brakes, such companies will have to develop strategies that favor viability of their projects. Bloomberg Línea spoke with experts and innovative companies from Europe that also have a presence in Latin America to learn about the five most important challenges that lie ahead, and what will determine whether a business has the potential to take a slice of the venture capital cake.
1. A volatile and changing environment
This is both a challenge and an opportunity, according to Joan Riera, president of the Active Development consultancy and professor at the ESADE Business School. “There is no better time to set up a company. In an environment like this, startups are much more flexible and agile than traditional companies to make decisions, and they adapt more easily to changes”, says Riera, who during his career has set up 12 companies, “many of them in the midst of crises”.
The same view is shared by Alejandro Gutiérrez-Bolivar, co-founder and CEO of Ladorian, a provider of point-of-sale digital advertising in Europe and Latin America. “This will be a year very much for those with entrepreneurial DNA, for those who know how to navigate uncertainties,” he says.
2. More expensive capital and less investment
The saying goes that big fish come when the currents are strong. But now the investment tide seems low and without a current - the macroeconomic backdrop is not the most favorable. Recent interest rate hikes by central banks around the world, combined with the erosion of consumers’ purchasing power in the face of high inflation, have reduced the capital available for investment. Well-functioning supply chains are another challenge for 2023.
According to Crunchbase, global VC funding in 2022 amounted to $445 billion, a 35% year-on-year decline from the $681 billion raised by startups in 2021. This decline is steeper than that experienced after the 2008 financial crisis or the dotcom bubble, according to data from consulting firm Preqin.
3. The ability to monetize and scale
“With choppier seas, more winds and less calm waters, entrepreneurs will have to leverage their competitive advantages in a more robust way than ever before,” says Ladorian’s Gutiérrez-Bolivar. “Demonstrating business models that impact the bottom line in a positive, short-term way is going to be a must”.
Albert Nieto, founding partner of Seedtag, which offers contextual advertising solutions based on artificial intelligence (AI) and machine learning (ML), foresees a “bad global situation, much, much worse than in 2021″, but he assures that “there will always be some money for good projects”.
According to Nieto, the main challenge for startups is “earning the right to exist”, which depends on finding the perfect fit for the product in the market, and the company’s ability to build customer loyalty and retention. “For a business to be investable you have to focus on ideas that allow exponential growth, to be able to multiply the value invested by 20, 30 or 40 times,” he says.
In the case of scaleups, the key is to “demonstrate that the product can be sold on an international scale”, according to the founder of Seedtag, which last year was the beneficiary of one of the last big deals in Europe, receiving last year more than 250 million euros in investment from Advent International - between primary and secondary capital, that is, new resources and for the purchase of a stake of a partner who left the company.
The ability to measure results is a necessity that brings challenges, as well as being able to validate the business model, to measure KPIs very well and to act quickly in the face of errors, according to Ladorian’s Gutiérrez-Bolivar, who added that inflated company valuations can make this assessment difficult.
4. The battle for talent
The tech world is seeing mass layoffs, at the same time that society is witnessing an accelerated technological disruption. Retaining talent in a context of crisis and high competitiveness is another challenge identified by experts.
Joan Riera also points to the change in behavior as a result of the pandemic. “After Covid, the concept of freedom has taken shape, so that talent retention has become both a challenge and an opportunity,” he says.
For Ladorian’s Gutiérrez-Bolivar, talent retention is crucial because it affects companies at a tactical and strategic level.
“You have to integrate talent in a productive way, adapting it to the mixed scenario of teleworking and face-to-face. However, the new ecosystem has not made it easy for us to maintain the consolidated team spirit, so when you talk about talent it is fundamental, people want to work with who can contribute,” he says.
Juan de Antonio, a founding partner of Cabify, says that the startup and scaleup ecosystem is constantly looking to perfect its tools to improve talent management, and notes how Spain’s new startup law, which improves the taxation conditions for stock options, has taken steps forward to put more value on its professionals.
5. Innovation, first and foremost
Venture capital tries to identify companies capable of announcing a disruptive technology, but which still do not sacrifice profitability and scalability. “The markets, from a commercial point of view, have to be very attentive to the sectors that are sailing well, who has a stronger position,” according to Ladorian’s Gutiérrez-Bolivar.
Riera, meanwhile, believes that healthcare innovations will have a lot of output, “especially mental health”, followed by exponential tech themes - digital transformation, AI, 5G, Internet of Things (IoT).
“Customers are asking for more experiences, they are connected and want to learn from everything,” he says.