It might not be about to burst, but the tech bubble is being pressure tested.
With the lessons of the 2000 dot-com crash still top of mind, startups are having to work harder than ever to prove their worth and secure capital in an ultra-competitive environment. As venture capitalists become more cautious with how they dispense funds between thousands of tech firms with very similar product offerings, the funding market is increasingly difficult.
On top of that, the IPO market is becoming more challenging for up-and-coming startups to approach confidently, or at all. In fact, no tech firms went public on the Nasdaq in the first quarter of 2016.
A host of U.S. tech companies that had been given sky-high valuations are now trading well below their IPO price not long after going public. Mobile-payment firm Square, co-founded by Twitter CEO Jack Dorsey, went public in November and has struggled to maintain its IPO price ever since. Other tech firms like Fitbit, Box, Etsy and Pure Storage have also faced long periods of turbulence after seeing their stock prices fluctuate and struggle to maintain their value at listing.
Many companies have witnessed this market flux and chosen to rely on private funding for longer periods of time and it seems every CEO in the tech industry is worried about the economic climate. It is an intimidating time to be running a startup.
However, I don’t believe a collapse is imminent. There is still abundant opportunity for startups to secure the resources they need to grow and thrive, if they prove their worth.
For founders, the key to successfully negotiating the volatile market environment lies in strategically showing the value of your business. There are a number of key questions potential investors will ask about any startup seeking backing, and the answers are an indication of its long-term viability. Some of these include:
Do the founders have previous startup experience building a venture-based business from the ground up? Having experience at growing and selling a previous company at a profit shows investors their ability to execute.
Does the start-up have clear metrics, a strong strategy, and can it show competitive value in the market?
What’s the market size for potential users? If the business model is based on a market of just 100,000 people, it likely won’t survive or scale.
What kind of traction does the service have among users, and what is the retention rate? Do customers try it once and never go back or do they use it repeatedly and often and refer their friends to use it too?
For example, Secret was a text-only messaging app in which messages disappeared after the recipients read them. Quirky and fun, Secret appealed to only a very small number of users who cared about their messages disappearing. The company raised $35 million before deciding the service didn’t have a strong market fit and returned most of their funds back to investors.
Is the geographic market right for the investment at this time?
What problem does the business solve? If it doesn’t solve a problem, people are unlikely to want it.
Having a clear idea of how these questions would be answered honestly is the best indication of how successful a startup could potentially be. Every founder should be prepared to answer them at a second’s notice.
The markets have spoken, and investor sentiment has shifted. Founders must be able to prove themselves and their ideas in 2016 more than ever before to convince investors to place their hard earned dollars behind them.