The Economist had a good 2022 year-end article on how the environment has suddenly changed for Big Tech:
As I read the article, I asked myself how these factors impact emerging scaleups:
1. Digital markets are maturing.
The digitization of the economy is continuing, but at a slower pace. The article mentions advertising where the growth in that area is slowing as the offline to online shift is mainly complete. In a larger context, “the greenfields are gone”. The accessible applications for digital technologies are taken. Your customers are more sophisticated about their needs and how they choose their solutions.
- Founders need to dig much deeper to identify the utility of their solution (problem-solution fit) and the value of this utility for the end-user. First, design the business, then build a product that fits the business. Too often, technical founders do things the other way around and hit a brick wall when attempting to transition from development to deployment.
The idea that the holy grail is achieving monopoly in your market, as promoted by Peter Thiel in his book “Zero to One”, is over. The titans are still there: Google in search, Facebook in social media, and so on. However, their position as monopolists is under attack. Amazon’s web service is undermined by Google building their own web services. New AI-powered alternatives threaten Google’s search supremacy. Facebook’s audience has moved to imagery-focused media such as TikTok, with only the “olds” remaining.
- Founders need to be much more aware of the competitive landscape. Success at scale no longer requires domination of a market but becoming a vital influencer of the value chain. Look at how you add value to your partners and stakeholders so that you become their indispensable choice. Influence is the new driver of value.
3. Interest rate increases.
The massive jump in interest rates in 2022 is causing a significant shift in the Venture Capital business model. Tech companies traditionally enjoyed easier access to private money because they could promise outsized returns. Low interest rates cushioned the higher risk. Now that interest rates have increased by 4 or 5% in 2022, the risk premium is much more expensive to the point that there are more profitable – and less risky – places for investors to generate the higher returns they need.
- Founders need to realize that there is not a money shortage; there is a shortage of good places to invest money. Therefore, your pitch to investors should not just promise significant returns. Instead, you must demonstrate how you de-risk your venture through strong and continuous customer discovery efforts, evident and validated problem-solution, product-market fit, and disciplined execution.
4. Supply chain issues.
Whiplash in supply chains is only going to get worse. If your product requires hardware, it will be challenging and expensive to obtain the components you need. Outsourcing to Asia is not as straightforward or cost-effective as it used to be due to China’s COVID problems and the scramble to build capacity in other countries. In addition, shipping remains unreliable because of geopolitical tensions, worker shortages, and climate impacts. Even if your product is software only, you need to consider your client’s ability to invest in the systems required to run your solution.
- Founders need to be very aware of the supply chain issues, which will complicate planning. For example, you may need to build inventory, which is costly. Or downgrade capabilities to match better what your clients have in their inventory. The more you externalize costs, the more vulnerable you become. The added costs of supply chain issues will impact your ability to scale profitably.
5. Talent shortage and increased costs.
This point was not addressed in the article. However, it is critical. Demand for specialists is peaking, as are their salaries. In addition, the decentralized nature of the tech workforce means that employers, from the employee’s point of view, are interchangeable.
- Founders must match their scaling plans with their ability to build their teams. Less experienced developers may be easier to find and cheaper to hire, but they come with significant training costs. And once they have some experience, they most likely will be poached by firms that can offer better compensation. Forethought and care must be taken when growing your team. People do not scale fast.
It may seem that all is doom and gloom for tech scaleups. However, I am convinced that this is the best time to grow by adopting the Momentum Scaling mindset: manage uncertainty, then maximize execution.