As fears of a looming recession intensified among investors heading into the beginning of 2023, so too have the worries of early-stage entrepreneurs about their prospects of raising the funds they need to continue scaling their businesses. And with a majority of software, internet, and fin tech companies trading below pre-pandemic 2020 prices, it’s reasonable to expect investors - both retail and institutional - to exercise more caution heading into 2023. However, as investors and VC firms adjust to “new-normal” conditions post-pandemic, there are many reasons for optimism among founders as well. 

First, to further illuminate the reasons for concern among founders, Crunchbase recently reported that, “investors put $39.7 billion to work in seed- through growth-stage deals in Q3, down 53% year-over-year and down 37% from Q2,” a sure sign that firms are tightening their grip on their cash reserves. More specifically, the $3.3 billion put into seed stage deals in Q3 2022 constituted a 6% decrease from Q3 2021. Nevertheless, this drop-off in seed stage funding year-over-year was far less pronounced than that of later round deals. This signifies that even though market conditions have made investors wary of opening their checkbooks, they are still relatively willing to take risks on companies that, while more likely to fail, are at smaller valuations. In addition to this, it’s important to note that 2021 was a record year for startup funding, so it’s unsurprising that 2022 rounds didn’t live up to the previous year’s standards. 

Looking ahead to 2023, founders will surely have more difficulty across the board securing commitments from angel investors and VC firms alike, but there are certain steps founders can take to improve their chances of success. Sequoia Capital advises founders to focus on disciplined, durable growth over the medium and long term in order to generate meaningful value appreciation, according to a report by CNBC. While it seems simple that a focus on profitability is the best way to extend one’s runway when outside capital is harder to come by, it’s also important to remember that a mindset of “growth at all costs,” is no longer being rewarded as investors become more hesitant. The silver lining is that much dry powder remains in the pockets of VC firms, ripe for the taking by founders that demonstrate steady, sustainable growth, thus offering favorable exit opportunities in the long term. 

The reality is that no up-cycle lasts forever, and record years are rarely immediately topped. I na year of much uncertainty, investors have reined in their spending, though this too, won’t last forever. Exit conditions may be difficult to discern in the current climate, but for companies farther away from those exits, this won’t dissuade possible investments as much as it will for those raising Series A rounds and beyond. Though recovery from a potential recession may be slow, those that are most prepared for difficulties and most adaptable to change will be best positioned to not just survive, but win as well.