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Startups in Crisis: Time to Readjust Priorities, Prove the Business Model

Amid the layoffs and belt-tightening, experts consulted by Bloomberg Línea offer tips to startups on how to survive the encroaching economic crisis

Photographer: Luis Antonio Rojas/Bloomberg
June 06, 2022 | 09:00 pm

The bad news regarding job cuts at tech startups continue, with Brazil’s 2TM laying off 12% of its workforce and Peruvian social commerce company Favo also laying off staff and ceasing operations in Brazil, a country it entered in 2020.

But while it is true that the crisis is mostly affecting startups, analysis by research and data company PitchBook predicts that not everything will be negative.

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The current environment marked by higher interest rates and a potential recession has seen venture capitalists tighten their belts, although for some sectors the adverse times may be an opportunity for growth, as macroeconomic indicators will move consumption and trade patterns.

According to analysts’ predictions, the winners could be software companies, those involved in climate technology, cybersecurity and artificial intelligence, while the losers could be fintech, foodtech and blockchain.

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Investors and entrepreneurs consulted by Bloomberg Línea shared their survival tips for startups, and we present seven commandments for startups facing an adverse economic scenario.

1. Focus on solving real problems

In an interview with Bloomberg Línea from Argentina, Mariano Mayer, a co-founder of Newtopia VC, said: “We will have to focus on solving real problems, on generating good products for those solutions, on building good teams, and on taking care of the cash flow”.

The investor behind Newtopia VC, a fund that has among its ranks the founders of MercadoLibre and Globant, Marcos Galperin and Martín Migoya respectively, added: “It is very important that they seek to solve a big problem, that there is a big market and an opportunity in Latin America”.

And he added that the region needs more, and not fewer, entrepreneurs.

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2. Test the business model

Brian Siu, Latin America manager of the unicorn Jeeves, spoke to Bloomberg Linea about the current situation during the recent FinnoSummit fintech event, and said he believes that, in times of economic crisis, there must be a market correction.

“In the short term, the market sometimes has to correct itself, and I think that, unfortunately, some players who have not managed to prove their business model may end up exiting the market,” he warned.

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“Many inexperienced entrepreneurs with bad ideas were able to raise tens of millions of dollars to create easily replicable businesses. Now that the market is returning to a more realistic state, many of these startups will not survive,” added Alexander Torrenegra, CEO of Torre, in an interview with Bloomberg Línea.

3. Grow, but not at all costs

For Fabiola Quinzaños, principal at monashees, “the key to surviving in these times of crisis is to have sustainable growth; it is good to grow, but not at all costs. You have to be sustainable, without burning all the money available”, she said on the sidelines of the FinnoSummit 2022, which brought together the most important players in the fintech segment in Latin America.

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The steps entrepreneurs need to take may be slow, but need to be sure, she added.

“Right now, investors are seeing the opportunities that are out there, especially because the investments are long-term plays,” Quinzaños said.

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4. Be as resilient as a cockroach

Before becoming unicorns with billion-dollar valuations, startups must survive like cockroaches in adverse times, Y Combinator advises its new generation of founders.

Mexican entrepreneur Omar López, CEO and co-founder of Clupp, was part of Y Combinator’s winter 2022 batch, and recalls that while he was in the acceleration process he saw how the venture capital situation got complicated until Demo Day. That’s when they got some advice: survive like cockroaches do.

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The term cockroach associated with startups was coined by Caterina Fake, co-founder of Flickr. In a 2015 article titled The Age of the Cockroach, the entrepreneur said that a tenacious, fast and adaptable pest would be arriving to take the place of the unicorns.

5. Take advantage of the available supply of talent

Faced with the wave of layoffs that has occurred in the United States, Europe, Brazil and Mexico (although where it has so far only affected the cryptocurrency exchange Bitso), Colombia is one of the countries that is already preparing for the moment when the domino effect hits its startups.

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Colombian Daniel Bilbao, CEO of Truora, in recent weeks opened a virtual platform called Pivot to receive applications from employees of startups that have been laid off in recent weeks and from companies that wish to relocate their collaborators that they can no longer keep on payroll. The goal is to match employees with companies that require these profiles.

Amid the crisis, however, “there are positive things. There will be more talent at more reasonable costs, there will be more people available to work, and this is good news,” said Federico Antoni, founder and managing partner of ALLVP.

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6. Don’t burn all the money

Going back to basics means reprioritizing profitability over exponential growth. For example, according to Jeeves’ Siu, “at Jeeves we see the importance of building a sustainable company, from the ground up, and not just be thinking that I’m always going to raise money from venture capitalists”.

“The plan now is to focus on the business we are building, on maintaining healthy growth in the current market environment and increasingly improving operating and net margins,” added the head of the $2.1 billion-valued unicorn.

7. Be guided by the experts

In these challenging times, investors will play an important role as mentors, according to those consulted.

“It’s going to take more effort from all of us, to be very, very close to the companies in which we have already invested to help them get through a challenging or complex time in the best possible way,” according to Newtopia VC’s Mayer.

For his part, ALLVP’s Antoni recommends that entrepreneurs rethink their business model and rethink their plans. And he acknowledges that perhaps part of the crisis in startups is due to investors’ advice: “We are to blame (...) we recommend growing fast to raise more capital”, but it is time to readjust priorities.