Support Network for Earliest-Stage Startups
The climate for early-stage startups is unfavorable, which makes choosing the right people to help more important than ever.
The after-COVID years in the startup industry are turbulent at best. The lockdowns have gotten a lot of businesses striving to move online or expand their presence there. The big techs embarked on a race to hire more developers to build next-generation, well, something groundbreaking. The whole industry thrived.
The market followed the belief that it would keep going "up and to the right." Securing funding for a new startup idea wasn't that much of a challenge. Sure, it wasn't the heyday of the dot-com bubble of the late 90s. But only because there were way more contenders, not less money.
The Rollercoaster
Then, the fate turned. We completed much of the simplest stuff under the umbrella of moving businesses to the internet. The big techs realized they might have gone on an overhiring frenzy and didn't have meaningful products for all these engineers to work on. The layoffs followed.
If that weren't enough, we had bad news, big and small, coming from various places. All-out Russian aggression in Ukraine increased the global inflation pressure, affected growth, cut optimism, and pushed uncertainty levels through the roof. In the meantime, the interest rates went up significantly, increasing the credit cost dearly. Local facts, such as the Silicon Valley Bank's bankruptcy, made the availability of money even worse.
No wonder the investors started playing defense.
While the cumulative numbers don't seem that bad—they're still roughly what they were pre-pandemic—they’re skewed by the outliers, the few biggest (and thus, safest) deals that inflated the track record.
AI Factor
If that wasn't enough, the advent of AI for the masses increased the uncertainty even further. On the one hand, we hear how all these developers are irrelevant as LLMs will take over a good part of their jobs. On the other, there's unsated AI hype; every new product must be AI-powered.
Go figure why we have so many shady AI product ideas pitched. It's like a dot-com bubble all over again, except this time it's a dot-ai one.
Furthermore, the AI models promise to remove the need for technical knowledge in building digital products. The barrier that might have kept folks from creating their startup has seemingly disappeared ("seemingly" being a keyword here, but that's a topic for another conversation).
It shouldn't be a surprise that aspiring founders come in volumes we've never seen before.
Capital (Un)availability
If there's one picture for a thousand words, though, it is the following (from PitchBook-NVCA Venture Monitor).
With funding options dwindling and the barriers to becoming a digital entrepreneur disappearing, the capital's demand-to-supply ratio skyrocketed.
In simple words, it is easier than ever to dream of becoming a founder, but it's harder than ever to get the new venture funded.
On a recent trip to eMerge Americas, a big startup event, I heard potentially heart-warming news. Looking at the trends, experts suggested that:
We'll see more IPOs coming despite valuations below the historical highs.
We'll see better funding availability as hundreds of billions are sitting uninvested in the VC funds right now.
Let’s pretend for a moment that the recent tariff war never happened and the above still held true. After all, we don’t know what unexpected change of pace awaits us next week.
For an aspiring entrepreneur, the news about VCs sitting on piles of money is a good one only at its face value. In reality, it's more of a mixed blessing.
Playing Against the Odds
Yes, if tariffs are willing, we might see more funds available for grabs. But we also have thousands and thousands of new ventures trying their luck.
Everything else being the same, the investors would always prefer less risky (thus, more proven) endeavors. In this game, they will wait until they see more proof of startups' business models.
After all, seeing all those new contestants, there will be enough survivors to choose from. Does it fetch a reference to the Hunger Games? Not without a reason.
While the climate might eventually improve, one cohort will see it very, very late, if at all. These are pre-pre-seed companies.
They still try to showcase that their idea will work. Or they aren't even there. They might be at the ideation stage altogether. In either case, there's nothing proven yet.
The startup ecosystem, as it is, doesn't support them nearly enough. No one is interested, even if the ideas might be great, as there's nothing to monetize yet.
And again, you can look at the numbers. These days, pre-seed money is high 6-digit or 7-digit. It's rare to see the initial investment below $100k. All that, despite technology that's helping us with rapid prototyping and aggressive validation.
Choose Support Carefully
These numbers tell us a sad story. Very few care about fledgling startups at the earliest stages. Especially not those who later rely on a healthy stream of validated ideas to get a good return on their investments.
So, where can these pre-pre-seed companies get valuable help? We need three factors:
Long-term experience in product development, as we recreate the same patterns over and over again.
Understanding the broad body of knowledge under the Lean Startup umbrella to avoid wasting resources on building too much (or the wrong thing altogether).
Knowledge of the capabilities of current technology, especially that it enables easier, cheaper, and more rapid experimenting.
In short, we need practitioners who have built many things in the past. We need folks who have failed many times and learned from the experience.
Being in this business for a quarter of a century, it's a sad realization how few software agencies/consultancies can actually provide such help. They still largely live in the realm of feature factories. "Tell us what you want, and we'll build that for you." That offer is neither attractive to aspiring founders nor promises long-term existence.
As a rule of thumb, if you are at a pre-pre-seed stage and seek help, look for people who will tell you to build (way) less than you want. If they can boast experience in multiple failed product development efforts, that's definitely a plus.
Listen to their stories. Learn from their experience.
Because no matter how much you love your idea, you play the game against the odds.