Code Brain | 4 Things Startups Should Do in 2023

When the internet industry's growth curve shifts from exponential to flat, Big Tech slows its expansion and lowers expectations. The headwinds die down. For startups, this means stiffer competition within the sector, and the old playbook of rough-and-tumble growth no longer works. In this environment, software startups watch potential customers slash spending and lower their risk tolerance. So what should founders do?

The most common advice is obvious: embrace strict cost control and extend your cash runway. But tightening the purse strings shouldn't blind entrepreneurs to the fact that this is also a moment to recalibrate — so that when growth returns in 2024 or beyond, the company is positioned to thrive.

Shifting growth curves kill many promising companies. They also create space to realign the business in ways that no one had time for during hypergrowth. During the current slowdown, startup CEOs should focus on four things.

Zero In on the Product Core

Over time, most startups accumulate features and functionality. The further from the core, the weaker the customer value. During high-growth periods, engineering teams can't resist the temptation to chase hot, flashy new features for the next release. In today's environment, CEOs need to rationalize their product roadmaps, build sharper, more compelling case studies for target customers, and drop modules that may be peripheral. In 2023, assume most enterprise buyers will only pay for what's absolutely critical. Software vendors must refocus their offerings on obvious, indispensable user needs.

Cloud usage also needs a hard look. Cloud services make it trivial to spin up and distribute new features. At most software startups, cloud spend has quickly become the largest cost after headcount. During rapid growth, these costs were hidden, but they compound to surprising totals. Innovative software entrepreneurs shouldn't end up as resellers of cloud services. A downturn is the right time to optimize cloud spend meticulously. Many product and engineering leaders resist this work for the simple reason that optimization isn't as exciting as building new features. But CEOs need to keep cloud costs running at reasonable levels in their innovation flywheel — and start moving back toward the holy grail of all successful software businesses: high gross margins.

Understand Go-to-Market Costs Deeply

In the heat of competition, most early-stage companies don't know whether they're under- or over-investing in go-to-market. Few paid attention during the "growth at all costs" era. When growth stalls, startups must grasp how sales and marketing spend relates to revenue — and what that means for operating leverage.

Finding the right GTM metrics isn't easy. Over the coming year, leaders should dig into which metrics justify scaling sales: minimum ARR (annual recurring revenue) and profit contribution per rep? Payback period and customer retention? These benchmarks will matter more in future fundraises and face heavier investor scrutiny. Revenue growth alone won't be enough to convince them.

Sales talent needs attention too. In a company with 8–10 reps, losing two strong performers can be a serious blow. Leaders must invest time in understanding how to retain top sellers, crafting compensation packages — cash, equity, or whatever it takes — to keep them in place.

Bank Senior Talent for the Next Phase

Tech giants shedding headcount has flooded the market with an unusual wave of high-caliber candidates. In a slower-growth environment, small companies shouldn't think about upgrading their current team. Instead, they should use this window to pre-hire senior talent who will be needed for the next phase of growth.

In a company's early days, building a team that can scale with the future is hard. The current leaders may not be the right ones to run a function as the company approaches its next inflection point. Today's talent market creates a rare opportunity for startups to reach candidates with the leadership experience to help the company scale from zero to $20 million, $20 million to $50 million, $50 million to $100 million, or toward an IPO.

This applies to boards too. Startup leaders should start thinking about which independent directors could bring relevant experience and perspective to fuel growth. If there are potential candidates, start reaching out now.

Deepen Ties with Future Investors

Proactive communication is essential for fundraising in 2024 and beyond. For many early-stage software founders, this is unfamiliar territory. In recent years, they grew accustomed to undiscriminating investors coming to them and rounds closing quickly. The current environment demands more — and new approaches.

Even founders at startups with stable revenue and growing teams need to take the initiative with prospective investors. Select a handful of investors, establish a regular communication channel, walk them through your technology and business roadmap, and keep them updated on company progress.

Investors will likely scrutinize the business and valuation more carefully, ask tougher questions, and take more time deliberating before committing. Spending 2023 building these relationships rather than waiting until you need the money is likely the better trade for founders.

Slowdowns carry risks, but they also create new opportunities. Startups that take the right actions now won't just survive — they'll emerge stronger and in a more advantaged position when high-growth times return.

Source: Four Tasks for CEOs in 2023 (https://greylock.com/greymatter/four-tasks-for-ceos-in-2023/)