The Year in Review and the Year Ahead:
Five Insights from Propeller Industries
December 30, 2022
Few of us could have predicted how quickly the financing environment would shift in 2022. After years of obsessive focus on topline growth, profitability is suddenly a priority. We knew the party had to end – capital is to investors and entrepreneurs what beer is to college students, and it should come as a surprise to no one that too much liquidity drives overconsumption.
The good news is that healthy business fundamentals look the same today as they did a decade ago, so it’s not hard to know what we need to do. The bad news is a lot of companies got funded (and many, if not most of them, over-funded) during the binge, and not all of them are going to make it. Those who course-correct early and aggressively are going to dramatically improve their odds.
By shifting the focus to profits, tighter capital markets have forced companies to be more capital-efficient and reduce their emphasis on growth. Headcount, customer acquisition and COGS (for consumer brands) are the largest components of spending, so that’s where the magic needs to happen. This might mean outsourcing services for longer, delaying capital expenditures and re-evaluating suppliers. But this also means slowing down – or put another way, do a little less growth with a lot less capital.
Our Financial Planning and Analysis team can help you build budget and forecast scenarios for 2023 with a downside model to ensure you’ve got the right amount of capital to get through the year. Tap into our industry benchmark data across different verticals for guidance on where you might be over- or under-spending.
#1. Fundraising Challenges
Access to capital is the lifeblood of startups, which is why Propeller’s Transaction Advisory team specializes in helping clients achieve their fundraising and exit goals. Working with more than 800 startups over the last 15 years has provided us with the benchmarks, pattern-recognition, investor relationships, and data to effectively raise capital. We recommend starting your fundraising process early in 2023, as we expect it to take longer and require more due diligence.
#2. Scrutiny Around FTX Crypto Collapse
Following the collapse of crypto exchange FTX, its founder Sam Bankman-Fried blamed “sloppy accounting” for the exchange’s implosion. “I didn’t know exactly what was going on,” he reportedly said. But as a founder, you should never have to say this. There’s no reason why you shouldn’t know exactly what’s going on with your finances at all times, no matter how complicated it may seem. This is where Propeller shines: we give you transparency into your books, capital, and process, so you can have a confident understanding of where you are and where you’re headed.
#3. Digital Advertising Headwinds in D2C
D2C advertising used to rely on third-party cookies to effectively hyper-target audience segments, resulting in high engagement and conversion. Then Apple and Google enacted privacy changes that dramatically changed the landscape, and privacy legislation on the horizon could have an even bigger impact. Startups that drove clicks through Facebook and Google Ads are now seeing unsustainable increases in their CAC, and they’ve had to get creative. We’ve seen online advertising shift from acquisition to brand awareness, retargeting campaigns have become a higher priority, and marketers are diversifying ad spend across new channels. We’ve also seen D2C companies experiment with BAM, wholesale, and other in-person shopping options.
#4. Supply Chain Woes
In 2021, when shoppers stuck at home were happy to spend their money online, Covid created supply issues for CPG companies that simply couldn’t meet the demand. Inventory was slow to build, challenging to ship, and escalating in cost. Then, anticipating a hot holiday season, businesses from small brands to large retailers like Target and Wal-Mart dealt with two inventory nightmares. Either demand was not as strong as expected, and they were left with inventory overages, or orders were strong but the supply chain didn’t deliver in time, and retailers were stuck with inventory that became off-season. Coming into 2022, many of our clients had too much capital tied up in inventory, which then put a strain on margins. We’ve helped clients manage this unprecedented challenge by shifting to cash, being cautious in their budgeting, and preparing for worst-case scenarios.
#5. Backoffice Transformation: Talent Acquisition and Tech Stack Security
We heard the terms “great resignation” and “quiet quitting” ad nauseum in 2022, but we also witnessed considerable layoffs and a slowdown in job openings. In 2023 we anticipate that companies will have access to more qualified candidates, and recruitment will be more cost-effective. Companies that offer remote, hybrid, and flexible work will likely have an easier time attracting candidates, as many are resisting the return-to-office push.
The permanence of remote work will require more focus on cybersecurity: 2022 saw sophisticated social engineering campaigns and data breaches that cost companies millions of dollars in financial and reputational damage. Reports show that 43% of cyber attacks are aimed at small businesses, and only 14% of small businesses are prepared to defend themselves.
When planning your tech stack, think about what your business needs today, and what it needs at your next stage of growth. The safety of your financial and customer data is paramount to your success. Choosing low-cost solutions at the expense of data security, or having no cybersecurity defense plans at all, will never be a good return on investment.
Looking Ahead: New Year’s Resolutions
Over the last several years we’ve become accustomed to artificial inflation and developed some bad habits we now need to break. People glamorized companies with irrational valuations and over-prioritized growth to an often unhealthy degree. Some startups modeled the behavior of companies that had face-value success but cracked foundations. We saw a lack of due diligence as FOMO drove the urgency to cut corners.
It’s time for some New Year’s resolutions. As you think about going into next year, make a vow to rely on your instincts. We’re inundated with 24/7 advice all day from VCs, Twitter, consultants, board members, and social media. But any kid who has ever run a lemonade stand understands the wisdom of being capital-efficient and profitable. Take a look at your business model and determine the right funding source: Venture capital is purpose-built to create unicorns, and it may not be the right fit for your business. Down rounds aren’t pretty but they’re going to be critical for many companies to succeed. I can’t overstate the importance of speed if you see this coming for your business.
We’re making our own resolutions here at Propeller. We’ve ushered in new leadership and expect to significantly transform our customer experience over the next 12 months. No matter what headwinds lie ahead, we’ll be ready to help clients navigate them.
Reach out to us to help guide you in 2023.