- The startup landscape is undergoing a "great reawakening," Tom Loverro, an investor at IVP, says.
- He's telling startups that pared back costs over the last two years to invest in growth again.
- Founders should not wait for the economy to make a full-blown recovery before increasing budgets.
Last year's dearth of capital for startups forced many founders to stretch their cash runways. Heeding the advice of their investors, they closed offices, laid off workers, and slashed software costs.
Efficiency is a hallmark of any good business, but Tom Loverro, a partner at the 44-year-old Bay Area venture-capital firm Institutional Venture Partners, thinks startup founders should step off the brake pedal.
The venture capitalist who correctly predicted a "mass-extinction event for startups" last year now says the worst is behind us. "We're on the cusp of a Great Reawakening for startups," Loverro wrote in a LinkedIn post.
Given that the cloud-software market is stabilizing and venture funding is available again to best-in-breed startups, Loverro is telling startups with sound unit economics to increase their cash burn to speed up progress.
"The existing customer base is no longer in slash-and-burn mode," Loverro told Business Insider. "That's a really good time to start thinking about going on offense responsibly."
Behind the doors of many startups over the last two years, they downsized sales and customer support and sloughed off new products and initiatives.
Loverro recalled speaking to a portfolio company at an all-hands meeting last spring. He urged the team to stay ruthlessly focused on what mattered most to the business. "What that means is: You can't do everything — at least at once," Loverro remembered saying.
Some companies reined in spending and emerged from a bear market in a good position to fundraise, while others still got caught in the death spiral. In the first half of this year, shutdowns hit Ghost Autonomy, an OpenAI-backed startup making self-driving-car software that raised nearly $220 million, TechCrunch reported, and the online news site The Messenger, which launched with $50 million in funding.
The sentiment among some investors, Loverro said, is that "Darwin" has done his job. The surviving startups should start investing in growth again.
"It's a little bit of Stockholm syndrome. The economy was bad and everything was dreary in '22 and '23, and it's very easy for board members and for founders just to stay stuck there," Loverro said. "I'm trying to shake people a little and say, 'Wake up, the macro has changed again.'"
He pointed to two data points showing signs of life in the software economy. Jamin Ball, an investor at Altimeter Capital, which holds stakes in public and private companies, tracks the performance of over 60 cloud-software stocks. In June, Ball wrote that the median quarterly growth rate for these companies ticked up in the first quarter of 2024 from the previous quarter's bottom.
Ball also observed a flattening of net dollar retention, a metric that measures a company's ability to retain revenue from a cohort of customers over a specific period of time. High net dollar retention implies that happy customers are spending more at a higher rate than unhappy customers are churning.
The median net dollar retention of the stocks Ball tracks dropped four points from 120% to 116% from the fourth quarter of 2022 to the first quarter of 2023. It continued to slide last year, but the decline has trailed off over the last two quarters, Ball says.
Loverro says startup founders may be tempted to wait to hire more sales representatives or invest in new products until it's clear the economy has bounced back. "That's too late in startup land," Loverro said. The savviest founders can see that the software market is "no longer just in free fall" and turn on growth while the market is "good enough," he said.
On LinkedIn, Loverro shared four strategies for how chief executives can "responsibly go on offense." He told them to set company goals with "stage gates" that unlock additional spending. For example, if a startup's sales reps hit a target of $1 million in sales in the first half of the year, they get the budget to hire five more account executives.
He also encouraged founders to try new things. If a new product is working, founders should increase its budget and "pour gas on it," Loverro wrote on LinkedIn. If it flops, founders should "be ready to move on quickly."
Lastly, he addressed the AI elephant in the room. Every company needs a machine-learning or big-data strategy to stay competitive, even if they can't yet imagine how the technology will affect their organization.
Loverro harkened back to the advent of mobile. "Even if you weren't Uber, you couldn't just stick your head in the sand," he said. "Everybody should have been worried about the implications of mobile."
