Study: Startup growth slows as funding stalls

Nearly two in three startup founders and CEOs (63 percent) say their business has declined or stalled due to the pandemic, according to new research from Delighted, a division of Provo-based experience management company Qualtrics. The economic pullback is slowing hiring growth among startups with only one in three (32 percent) planning to grow its employee base by 10 percent or more this year and 12 percent planning to pause hiring or even downsize.{mprestriction ids="1,3"}

Startups have felt the pain of an economy stretched by the global pandemic, inflation and the war in Ukraine, the study found. IPOs are being put on hold, funding is drying up and investors and boards are looking at companies more critically, asking them to use their funding more efficiently.

Most (88 percent) startup founders are worried about the current fundraising environment and ranked a lack of operating funds as their top challenge for this year, followed by lacking product market fit and talent acquisition. Additionally, startup founders said their investors are putting the most pressure on them to improve their tech infrastructure and simplify their supply chains, ranking those investor priorities above even achieving profitability and improving their pace of innovation.

“It was easy for startups to raise capital in recent years as markets valued growth over profitability,” said Qualtrics’ Delighted CEO, Caleb Elston. “During an economic shift or downturn, knowing what matters most to customers is mission-critical. The companies that get that right — quickly — stand to pick up outsize gains in market share and experience management is at the center of getting it right.”

In the face of these pressures from investors, startup founders ranked improving their customer experience and investing in technology as their two highest priorities for the next six months, above customer acquisition, securing funding and acquiring talent. With investors putting more value in business models and capital efficiency, startups are focused on reducing friction and better understanding how to serve their customers.

Despite setbacks from the pandemic, many startups are still planning to pay current and future employees more in both salary (49 percent) and bonuses (43 percent). However, one in four startups say they plan to hire remotely in less-expensive markets, potentially to offset some of these other pay increases. Most startups will operate under a hybrid model this year — 78 percent will be fully remote or hybrid for the remainder of 2022. A majority (68 percent) of startups said improving the diversity of their teams is a very important focus area this year.

Eight out of 10 founders are worried about the rising cost of doing business due to inflation and most (79 percent) plan to raise the prices of their product or service in the next three months to combat inflation and rising costs.

With the uncertainty and volatility of the markets putting many IPO plans on hold, only 3.2 percent of startups surveyed were planning for an IPO. For tech startups, it’s slightly higher at 4.9 percent. For most startups across all industries, merger and acquisition is the most commonly planned exit strategy (32 percent) followed by family succession (24 percent) and management and employee buyouts.

The Qualtrics study was conducted between April 6 and April 11. Respondents were selected from a randomized panel and considered eligible if they live in the United States, are at least 18 years of age, are employed full-time, self-identified as a co-founder, founder or CEO and self-identified as having taken venture capital funding for their current company. The total number of respondents was 251.{/mprestriction}