2023 will bring crisper methods for evaluating startup success

The momentum of the most active 12 months ever for venture investing did not carry over well into 2022, to say the least. As interest rates and inflation spiked, geopolitical challenges arose and the economy began trending downward, fundraising slowed dramatically throughout the year.

But if 2022 was a year of paradigm-shifting dynamics, 2023 will be a year when we’ll determine the winners and the losers — and more importantly, when crisper methods for evaluating success will emerge.

The landscape for software companies

The tech ecosystem has seen a few downturns (though none were meaningful) since cloud computing emerged as a dominant trend over a decade ago, but inflation is a new beast for many of us.

It’s been 30 years since inflation was a tangible, real-world macroeconomic consideration. When inflation is at 7%, if you aren’t growing by at least that much, you are shrinking.

In tandem with inflation, the demand curve is being whipsawed — we first saw a period of strong product growth driven by the COVID-19 pandemic, and now we’re seeing budgets and spending being tightened as startups and mature companies alike prepare to weather the storm.

We’re entering 2023 with a great number of known issues and a constrained ability to forecast what’s ahead. One thing’s for certain, though: This year will be more about nailing it than scaling it.

The predictors of success

In this environment, investors will look for efficiency metrics like high gross margins, strong gross retention rates (how many customers continue to subscribe each year), rapid expansion within customers, decreasing customer acquisition costs, shorter sales cycles and productive sales reps.

Gross retention, in particular, will be critical, because companies must be able to retain customers to stabilize their 2023 growth plans. In a difficult budget environment, high gross retention rates can be a strong signal that customers love your products and get real value from them.

Investors are also watching the path to break-even based on the current balance sheet — via metrics such as cash burn as a multiple of net new annual recurring revenue.

Assuming you have high gross retention rates, it may make sense to burn cash, but it won’t if you are burning more capital than the amount of new business accrued. As growth rates decline, many companies are slashing burn rates accordingly, resulting in a wave of layoffs even at companies with strong balance sheets and market positions.

2023 will bring crisper methods for evaluating startup success by Ram Iyer originally published on TechCrunch