How are European startups preparing for the tech downturn?

Most startups are cutting back in preparation for a tech downturn, but most aren’t hitting the panic button yet, according to respondents to our recent reader survey on how tech companies are reacting to market uncertainty.

Ninety-four startup founders and operators shared their thoughts and experiences with us, from a range of company sizes, sectors and countries in European technology. The word of the day: caution.

72% said their company has taken steps to increase their catwalk and 83% believe it will be more difficult to raise funds in the near future. 61% have cut or frozen hiring plans and 52% feel less secure in their job. Yet only 22% of surveyed startups have laid off staff so far, and those that are hiring predict that a glut of top-tier tech talent will now be available.

We also asked how conversations with investors have changed and what steps startups are taking to make their money go further.

Here’s what Sifted readers told us.

The Hiring Landscape for New Companies During a Tech Downturn

Two-thirds of those surveyed told Sifted that their startup has either rolled back or completely frozen hiring plans, matching recent reports from the jobs platform. otta that recruitment at technology companies has fallen 20% in the last three months.

What tech stocks crash and the VCs become increasingly greedy with their money, several readers said they are only hiring for essential functions as the focus shifts from growth to efficiency.

“We no longer negotiate salaries.”

According to one founder, round sizes have been halved in recent months and “this reduced ability to raise funds means we’ve had to cut back on hiring.”

Another said his startup no longer negotiates salaries, suggesting that the power balance in the labor market is changing from candidate to employer. Just a few months ago, in a reader poll On the hiring landscape, startup founders and operators told Sifted they were offering higher pay and better benefits as competition increased to secure the best tech workers.

“Some of our job offers have been rejected because candidates are afraid to make a move.”

But it’s not just employers who are chickening out. The uncertainty in the tech scene is also making some candidates more hesitant to accept roles, with one respondent who works in the talent department at his startup saying some candidates turned down job offers because they were “afraid to make a move.”

Tech startup layoffs

Other startup founders and operators told Sifted that they are actively looking to cut their payroll in anticipation of the tech downturn. They are not the only ones: several well-known European technology companies are lay off staff as they seek to shore up finances in the face of a looming economic downturn.

While Sifted readers reported that layoffs were not currently widespread, about a third of them believe that the startups they work for will lay off staff in response to uncertainty in the tech scene.

Because of this, startup workers feel significantly more concerned about their job security, with 52% of respondents telling Sifted that they feel somewhat or a lot less secure in the current climate.

We also asked Sifted readers whose startups had laid off staff and which departments had been affected. While the sample size is small, the data still paints an interesting picture of the roles European tech companies are cutting.

Sales and marketing departments have seen the most layoffs, with several respondents telling Sifted that these roles are the ones they’ve also stopped hiring for.

Talent and recruiting teams have also been affected, unsurprisingly, despite being in extreme demand late last year. Talent jobs also saw the most layoffs among staff in Klarna, according to a spreadsheet shared by the company.

Do Startups Have a Recruiting Chance During the Tech Downturn?

But not everyone is cutting hiring or shedding staff, with 39% of respondents telling Sifted that they are continuing to hire as planned or are actually increasing efforts to hire tech workers.

“Economic uncertainty is the best time to take the best talent in the market.”

Several said they are tapping into the talent pool in search of new jobs, following layoffs at some of Europe’s biggest tech companies.

“Now is the time to hire,” said one founder. “A lot of talent is available that would otherwise be hard to come by. Economic uncertainty is the best time to hire the best talent in the market”.

Another agreed, saying “they believe there will be tremendous opportunities to acquire top talent from failing competitors.” One respondent told Sifted that because so much talent is entering the market, his startup is actually considering accelerating growth plans.

Make money go further

72% of Sifted readers told us that their startup is already taking steps to grow its presence, with the biggest cuts coming in hiring and marketing spend. Of those whose startup had not yet cut back, half thought they would in the near future.

For many, this means slowing down into recession.

“We plan to sacrifice some growth to be more efficient,” said one founder, but this could have a negative effect on the business as a whole, they added. “I hope this means we won’t hit our target sales figures, as a lack of marketing spend means fewer leads, which means fewer sales. This will cause commissions to drop and the best salespeople will leave.”

Many are also cutting back on outside consultants, as startups seek to bring as much functionality in-house as possible, with some respondents also reporting cutting back on office space to cut costs.

Fundraising for Startups During a Tech Downturn

83% of Sifted readers told us they think it will be more difficult to raise money in the near future, and several said they are considering income-based financing instead of the traditional VC.

“We have lowered our expectations for the amount of financing and valuation.”

Eighteen respondents told Sifted that their startups are currently raising a round, with the majority reporting investors becoming more cautious and increasing due diligence. Others said the cost of capital has risen sharply.

“We haven’t changed our tone,” said one founder, “but we have lowered our expectations for funding amount and valuation.”

The increased scrutiny of investments has been a positive for companies with “good fundamentals,” according to one founder, as it allows them to stay above “FOMO noise.”

Seventeen Sifted readers said they plan to fundraise in the near future. Several expressed concern about the amount of capital they would have to give up and it was expected that they would have to put more emphasis on how the company would make money by launching.

But one founder was confident in the market’s ability to recover quickly. “At the moment the situation is very uncertain, but it will change in the fall,” they said.

“I am stressed and it feels like I have whiplash. […] previous milestones have changed overnight.”

investor pressure

41% of respondents told Sifted that they are under more pressure from investors to achieve profitability, which has led some founders to feel less confident.

“I’m stressed and it feels like I have whiplash,” said one. “Previous milestones have changed overnight, and there is no recognition for reaching milestones that were previously agreed upon.”

Another told Sifted that while his startup has “a very close relationship with all the stakeholders that are active in the company, targets and time-to-market are constantly moving, which creates friction.”

Others, however, said the increased focus on earnings is “understandable” and “has been positive, providing clarity for leadership.”

Are startup founders and operators worried?

While there is an expectation that things will get a little more complicated before they get better for most startups, the panic is yet to break.

But founders with less of a clue are worried.

“Even with significant cutbacks,” said one founder with six to 12 months of cash in the bank, “I worry that we may not have enough runway to weather the storm.”

Others think that whether or not the company can raise its next round will be decisive. “If we can increase our seed, we will be good for this recession,” said one respondent. “If we can’t, it will all be over very quickly.”

However, some startup founders and operators are less concerned, seeing the market leveling off after a two-year whirlwind of inflated valuations and massive investments.

“The current economic uncertainty is way overblown,” said one founder. “It’s tough for late-stage companies with inflated valuations, but most of the fear we see in the market is coming from venture capital funds that invested in 2020-21. [because they were worried about missing out on the best deals].”

“Savvy investors and companies are carrying on with business as usual, in terms of diligent investment and lean construction,” they added.

“The economy is not bad, it’s getting back to normal,” said another. “The last few years have spoiled the founders.”

Kai Nicol-Schwarz is a reporter at Sifted. He covers health tech and community reporting, tweeting from @NicolSchwarzK.

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