Entrepreneurship

2023 will bring sharper methods for evaluating startup success • TechCrunch

This year will be more about dunking than scaling

Swing on The most active 12 months ever for venture investing hasn’t carried over into 2022, to say the least. As interest rates and inflation soared, geopolitical challenges emerged and the economy began to slump, fund-raising slowed dramatically over the course of the year.

But if 2022 was the year of dynamic paradigm shifts, 2023 will be the year when we determine the winners and losers — and more importantly, when sharper methods for measuring success emerge.

The landscape for software companies

The tech ecosystem has seen several downturns (though none of them have made sense) since cloud computing emerged as a dominant trend more than a decade ago, but inflation is a new beast for many of us.

It has been 30 years since inflation was a tangible, real macroeconomic consideration. When inflation is 7%, if you’re not growing at least that much, you’re shrinking.

In a tight budget environment, high gross retention rates can be a strong signal that customers love your products and are getting real value from them.

In tandem with inflation, the demand curve is flattening — first we saw a period of strong output growth caused by the COVID-19 pandemic, and now we’re seeing budgets and spending tighten as startups and mature companies prepare to weather the storm.

We enter 2023 with a large number of known problems and a limited ability to predict what lies ahead. However, one thing is certain: this year will be more about achieving that than scaling.

Predictors of success

In this environment, investors will look for performance metrics such as high gross margins, strong gross retention rates (how many customers continue to subscribe each year), rapid expansion within customers, reduced customer acquisition costs, shorter sales cycles and productive reps.

Gross retention will be especially critical, as companies must be able to retain customers to stabilize their growth plans for 2023. In a tough budget environment, high gross retention rates can be a strong signal that customers love your products and are getting real value from them. .

Investors also look at the path to breakeven based on the current balance sheet — via metrics like cash burn as a multiple of net new annual recurring revenue.

Assuming you have high gross retention rates, it may make sense to burn cash, but it won’t if you’re spending more capital than the amount of new business that’s accumulated. As growth rates decline, many companies reduce their burn rates accordingly, leading to a wave of layoffs even at companies with strong balance sheets and market positions.

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