Section 1.1: Question A - Tech Recession vs. General Recession

The first question to consider is whether we are facing a tech recession or a broader economic downturn. A tech recession predominantly affects Series A and beyond startups that cater to other tech firms. Conversely, a general recession necessitates that all Series A+ startups adjust their forecasts. In either scenario, it’s critical to recognize that the benchmarks for future funding rounds have shifted, particularly if companies aim to surpass their previous valuations.

One silver lining in this scenario is the rise of software solutions penetrating traditional industries such as agriculture, healthcare, and government services. These sectors may be less sensitive to fluctuations in the tech market and more influenced by overall economic conditions. Although the days of a booming economy seem to be fading, a gradual recovery or slight growth in the U.S. market could have varied impacts on different startups. While the likelihood of a recession in 2023 appears to be increasing, expert opinions still suggest a modest probability.

Note: Startups in the seed stage should refrain from blaming “the market” for their struggles. If you’ve identified a total addressable market (TAM) of 10,000 customers, not being able to engage even a fraction of that in a year or two reflects more on your strategy than external conditions.

The first video titled "From 0 to Interviewing Customers Well in 90 Minutes" provides valuable insights into customer engagement strategies that can drive growth.

Section 1.2: Question B - Market Opportunities for Startups

The second pivotal question centers on whether specific categories will yield multiple startups valued at over $5 billion or if we will revert to a landscape dominated by a few single winners in the $1-$5 billion range. Not too long ago, a conversation I had with the CEO of a trendy startup revealed our shared understanding of how the market had evolved. We both grew up in an era where achieving a $1 billion valuation was a monumental feat, typically dominated by a single major player in each market.

However, we witnessed a trend where private investors rapidly pushed companies beyond the $1 billion mark, with many valuations continuing to climb in public markets. This led to the perception that various sectors could produce multiple substantial winners, thanks to their size and global reach. While it’s tempting to claim this was merely a bubble, I believe there is merit to both perspectives. Consumer behavior accelerated during the pandemic, shifting towards online services and shopping, and that trend is unlikely to reverse.

Simultaneously, small and medium-sized businesses (SMBs) have increasingly adopted SaaS solutions, demonstrating a lasting transformation. If I’m mistaken about the market size and these valuations remain low, we could see fewer outcomes exceeding $5 billion. This would revert us to a more traditional investment model, where ownership stakes become crucial, and the volume of private funding rounds at escalating valuations diminishes.

A $1 billion exit may benefit certain funds, while a $10 billion outcome provides returns across the entire investment spectrum, reinforcing momentum in funding during 2019–2021. Fewer substantial exits could lead to a contraction in late-stage private capital and reinforce the power law returns among leading venture funds.

Note: The misconception of hedge and crossover funds as "tourists" fails to recognize their investment strategy. They strategically balance investments across high-growth private ventures, profitable private enterprises, and public markets, optimizing their capital allocation based on risk-reward scenarios. Currently, many public stocks appear more attractive compared to private startups, indicating a shift in focus rather than a transient interest.

The second video, "The Business Case (What Angels Really Want) with Mike Volker," explores the essential elements that angel investors seek in startups, providing critical insights for entrepreneurs.