How should founders prepare for a decline in startup valuations and investor interest?

When the World Health Organization declared the COVID-19 outbreak a global health emergency at the end of January 2020, the startup world held its breath.

Many entrepreneurs prepared for a slowdown in funding, putting hiring and expansion plans on ice as they searched for ways to continue operating in a world that had been remade by the pandemic. TechCrunch and other tech publications ran stories and interviews with investors who noisily departed Silicon Valley, screening potential investments remotely as they set up shop in Austin, Miami and elsewhere to see how the situation played out.

But the pandemic did not quell investors’ appetites: Last year saw new records set for VC funding, unicorn creation and, in some cases, far less interest in due diligence than in years past.

Money is still available for founders who have storytelling skills and timely ideas, but investors have higher expectations now when it comes to revenue and growth, which could limit the kinds of startups that receive funding.

The question under consideration this week: How should founders prepare for an eventual retreat in startup valuations and investor interest?

In this column, Natasha Mascarenhas, Mary Ann Azevedo and Alex Wilhelm, the trio behind the Equity podcast, share their predictions about what’s in store for startup funding and due diligence in 2022:

Natasha Mascarenhas: ‘The Lean Startup’ may head back to the bestseller list

When I first considered this question, I jumped to the obvious: Private startups, noting the public market slowdown, will refocus on their runway in preparation for a parallel cooldown in venture funding. But, as we’ve discussed previously, there is no shortage of venture capital in the markets today. Since all those mega-fund dollars need to go somewhere, I believe early-stage and mid-stage companies will be able to enjoy a capital-rich environment for a little longer than late-stage companies, giving them a bit of a bubble inside of a broader burst.

Is it idealistic to expect startups to build out leaner, less opulent operations in a growth-focused environment where so many enjoy lofty valuations and access to excess capital?

My thought is that, in response to a dip, we’ll see the re-emergence of lean startups that know how to stretch a dollar until it squeals. For context, Eric Ries’ “The Lean Startup” was written in response to the 2008 crisis and promoted the idea of testing, building and managing a startup all at the same time, prioritizing minimum viable products over a perfectly buttoned-up platform to create faster, nimbler organizations.