Here’s how VCs are advising founders and assessing startups amid the tech downturn

Whether or not the economy is in recession is still up for debate. But the startup world is definitely in one.

That’s one key point made by a panel of Seattle startup investors Tuesday night, hosted by the entrepreneur program TiE Seattle at the Global Innovation Exchange in Bellevue, Wash.

Many startups raised money at a time when venture capitalists were rapidly deploying capital. But those same investors are now slowing their pace, applying tougher expectations to companies looking to raise cash. This is pushing many founders to look to cut costs, reduce cash burn, and focus on profitability.

“Now we’re in that period where you have to face the music,” said Fuse Senior Associate Sara Lindquist, speaking at the event.

Venture-backed companies raised a total of $209 billion last year, down 36% from the year prior, according to a funding analysis by Ernst & Young. This funding slowdown is likely to continue in the new year, with interest rates still moving steadily upward in the face of persistent inflation.

To make sense of these headwinds, a group of venture capitalists shared their investing outlooks. The panel included Madrona Investor Elisa La Cava; Founders’ Co-op General Partner Aviel Ginzburg; Voyager Capital Partner James Newell; and Lindquist. The discussion was moderated by GeekWire Managing Editor Taylor Soper.

Read on for our four main takeaways from that discussion.

Are we in a recession?

• The short answer is yes, particularly for startups looking to generate revenue. “For our companies that are selling, it just feels a little different right now,” Madrona’s La Cava said. “And I don’t think that will change, at least for the rest of this year.”
• The panelists said investors are applying a more stringent criteria, refocusing on businesses with better margin fundamentals and a clearer path to their next financing round.
• Voyager’s Newell shared an anecdote of a founder saying his company would delay raising capital until the market comes back. He recalls telling that founder, “‘Whoa, guys, that market is never coming back.’”

Assessing future investments

• Founders’ Co-op’s Ginzburg said that one way in which his firm is considering startups is by their ability to grow without relying heavily on the capital markets and “dumb money.” He said his best performing portfolio companies are the ones that don’t run out of money.
• Fuse’s Lindquist said that the firm’s aperture was broad before the downturn but is now narrowing. She said the firm is focusing on business-to-business software companies that can “easily help with productivity and help with cost structure for businesses.”
• La Cava said founders should ask themselves: Where will you be in six months? If they are unable to realistically hit certain milestones that outside investors are looking for, then they should not raise capital to extend runway. “You don’t want it to be a bridge to nowhere,” she said.

Startups should keep costs low

• The panelists said that startups should manage budgets with the pretense and understanding that the economy will continue to lag. This includes cutting costs and maintaining low cash burn.
• A recent study by the corporate credit card company Brex found that many startups are reducing spend on advertising and marketing, electronics, and general business expenses.

Is this a good time to start a company?

• Layoffs at big tech companies might present an opportunity for startup founders to find a co-worker or recruit talent. For those laid off, the layoffs could offer time and runway to start a company.
• However, founders need to have conviction and be committed to the idea of starting a company. Lindquist compared the decision to when she was contemplating a career in music.
• “You know thyself, and the conviction that you have,” she added. “Recession or not, innovation never stops.”