A brief (really brief) guide into what the world would pay for.
Persistent inflation, rising interest rates, and challenging labour markets. Startups, which typically operate on tight budgets and rely on external funding, have a lot to think about.
With global inflation still above target in 2024 and central banks maintaining interest rates at high levels, there are still, somehow, a few ways for a baby business to succeed.
Inflation
Global inflation continues to hover above pre-pandemic levels, increasing the cost of goods, services, and raw materials, placing immediate pressure on margins.
Shipping costs still higher than pre-pandemic levels, and energy prices are somewhere near the moon. This hurts E-commerce business most directly, but the impact of elevated costs on the consumer purse impacts almost every sector imaginable.
Startups that can thrive against inflation:
1. Cost-saving technologies: energy-efficient technology companies like Span or Sense—which provide smart energy monitoring—have seen heightened interest as energy prices rise.
2. Budget-friendly consumer products: subscription-based services that offer perceived value, like Dollar Shave Club, continue to do well as - consumers need alternatives to premium-priced goods.
Interest Rates
The U.S. Federal Reserve’s benchmark interest rate is now 5%, up from near zero in 2020. Borrowing is now more expensive for startups that traditionally rely on venture debt or bank loans.
Rates will be eased downwards over time, but we are still far away from a reversion to even sub 2% and there is little room for investment as a result.
As a result, venture capital investment has declined. Global venture capital funding is on track for its worst year since 2015. This is after 2023 VC figures were already 35% down from 2022. Startups with less proven business models are struggling to attract capital as investors become more risk-averse in a higher interest rate environment.
Startups that can prevail in the face of stubborn rates:
1. Companies focused on capital efficiency. SaaS companies like Basecamp have historically operated on lean budgets and focused on profitability from early stages.
2. Fields like HR tech, cybersecurity, and cloud services, are benefiting from long-term contracts and subscription-based revenue models. B2B SaaS companies (Zoom-style businesses), which have stable customer bases and recurring revenue streams, can weather interest rate hikes better than consumer-facing startups reliant on venture capital.
Job Market
While inflation and interest rates pose challenges, the labour market has evolved in ways that present new opportunities. In 2023, tech companies (Meta, Google, and Microsoft amongst them) laid off over 200,000 workers globally, according to Layoffs.fyi. This has created an oversupply of highly skilled talent in fields such as engineering, data science, and product management.
Yet, demand for workers in certain sectors remains high. For example, the cybersecurity industry is facing a talent shortage of over 3.5 million workers globally, according to Cybersecurity Ventures. Startups that can attract talent by offering more flexible working conditions, such as remote or hybrid options, could benefit from a wider pool of skilled workers.
Startups positioned to succeed in this environment:
1. Automated cybersecurity startups: With the rapid rise in cyberattacks and a global shortage of talent, cybersecurity startups are poised for strong growth. Companies like Arctic Wolf and Tines, which offer scalable, automation-driven cybersecurity solutions, are thriving due to high demand from enterprises.
2. Remote work and HR platforms: With companies looking to manage distributed teams efficiently, platforms like Deel and Gusto have seen substantial growth. These platforms cater to the needs of a remote-first workforce, including payroll, compliance, and hiring.
Consumer Behaviour
Economic uncertainty breeds caution amongst consumers. Global consumers are adjusting their shopping behaviour to save money, opting for discounts and products with longer lifespans.
Startups that can navigate consumer trends:
1. Startups like Allbirds (focuses on eco-friendly footwear) are benefiting from consumers who value ethically sourced materials and sustainability.
2. Second-hand/circular economy platforms: ThredUp and Vinted, enable consumers to buy and sell second-hand clothes, are thriving as both cost and environmentally conscious shoppers grow in numbers.
Final Thoughts
The perfect startup? A capitally efficient company providing value-driven products and services.
While subscription-based models are useful in maintaining a stable income, this doesn’t address the core issue of consumer/client acquisition. The crisis-driven economic conditions of the last few years have eroded real wage values and purged public pockets. Up-and-coming businesses must account for the fact that its potential consumer base is looking for increasingly cost-effective solutions to everyday problems, and those solutions will be rewarded.
Comments