Startup companies are starting to realize that their business models of achieving quick growth at all costs might not lead to long term success. In order to gain any respect in the market, a company must ultimately be profitable. This realization has caused many startups to learn the principles of cutting costs.
Many startups have stopped hiring, closed offices and laid off workers. In the past few months, startups like Evernote, Hootsuite, Jawbone, Snapchat and Tango have all reduced their number of staff. The practice of cutting jobs is unusual at young technology companies. For instance, the first sizable job cuts at Google did not occur until about a decade after the company was founded.
Indeed, startups have realized that the goal of achieving extremely fast growth has not led to success. Making sure that the company is bringing in the cash is now the top priority. While strong growth might lead to hype and optimism surrounding the company, it is ultimately profit that shows who the real winners are.
Much of the cost-cutting is caused by the reduced amount of excitement in investing in startups. Investors are realizing that many of these young companies are being overvalued, and they are reluctant to put their money into a company where the only positive aspect is a high level of potential.
In the third quarter of this year, only about 1,800 fundraising rounds for startup companies took place. This is the lowest number in more than two years. Instead of spending money at many different companies, investors are generally focusing on seeking large deals with one single company.
Basically, the investors would rather swing for the fences with one big winner than diversify their investments. Meanwhile, smaller companies have been left high and dry. A recent poll showed that 95% of tech entrepreneurs believe that it will be more difficult to raise money starting next year.
However, many believe that the reduction of investment into startup companies is generally a good thing. After all, companies are traditionally considered strong if they can achieve profit. The model of judging companies for their ability to grow isn’t necessarily wise.
General partner at Foundation Capital Charles Muldow said, “The changes could actually create stronger companies. Whereas investors once favored startups that bring in customers at a loss to increase their revenue, many now want to see business models built around profit.”
According to Muldow, a big part of achieving profit involves cutting costs. Simply put, if a company is spending too much, it’s not making money. In the past, it was okay for startups to incur losses, as long as they were growing. But it seems like that way of thinking is starting to fall out of favor.
All things considered, expect there to be some contractions at many startups next year. Indeed, 2016 could spell the end of the rampant expansion by young and promising companies.
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