Navigate Fears of an Economic Downturn by Looking at the Facts

Contributors' opinions are their own.

A major downturn is upon us, and it's going to be a devastating economic bloodbath for startup companies. The economic downturn is still a prediction.

With major players preparing for the worst, limited partners, venture capitalists, and founders are following suit. whispers urge everyone to "act fast and raise now" while many VCs deploy capital quickly.

While the "raise now" sentiment buzzes about the industry, it's nothing more than action for the sake of action, since public equity markets have had their fair share of turmoil this year. People are moving money to make sure they are prepared for a descent.

How do we deal with the downturn hysteria? Separating fact from forecast is the first thing we need to do.

There are lessons for the young startup leader.

Notice how history is repeating itself?

It's hard to ignore the feeling of déj-vu when you hear about those letters going out. Did this happen in the past? The lesson to be learned is that VCs are poor macro forecasters.

It's difficult to predict the economy. VCs often get basic facts about macroeconomics and financial markets wrong. Party time and doom are the modes of choice. Everyone declares a financial apocalypse as public markets come down and the Fed tightens its belt.

There are tips for starting a business in an economic downturn.

The economy does not indicate certain doom — yet

The perspective will be gained by any VC with reliable economists in their network or investors with a background in economics. Good economists will admit that it's hard to know where financial markets will go.

Financial markets are trying to make predictions. Predicting an economic downturn later is the current downturn's prediction. Markets will go up if the economy does not sour as much as predicted.

It's insane to predict what will happen in the coming months because of the uncertainty in our environment.

It's not clear if the environment for certain startups has soured, even though the venture market turned out to be false alarms in the past.

You can make your startup resistant to investors.

Pay attention to predictions, act on the facts

If you don't raise now, every start-up will die.

Right? Right now, it's just a prediction. Thanks to social media, it's the equivalent of water-cooler gossip.

Even though a lot of people think there will be financial ruin, it's not true. There have been no additional financial difficulties amongst our portfolio companies that you wouldn't see in a healthy environment. It looks like it will be bad, but we haven't had a problem raising capital. Actions are far from what we're being told.

This doesn't mean that certain companies will not meet their fate. No matter what, the environment will pop their bubbles.

There are ways to sustain company growth during a recession.

Being prepared isn't a bad thing

As we watch a war rage in Ukraine, we are reminded of the uncertain world we live in. The Fed is trying to contain a supply shock driven inflationary environment. Portfolio companies and investors are wondering what their managers will do.

It isn't special. There will be more crises around the world. In niches like deep tech, where it's hard for generalists to jump into, there will be early-stage investment opportunities.

The stock market has been volatile.

A downturn is not a death sentence

One thing is certain, the hype train has stopped. The irresponsible investors are losing sight of what's important.

VCs are not economists. We can't say that many times. It will take five to seven years for investments to have exits.

Even though the downturn remains a prediction, be wary of any VC who skews their investment strategy for a short-term market gestalt.

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