DST Global Managing Partner Tom Stafford on Navigating Economic Uncertainty
In a recent interview at the Bloomberg Tech Summit, Tom Stafford of DST Global warned that by the end of 2023, thousands of companies will go out of business. Yet, despite that warning, tech companies continue to follow the venture capital business model driving them into the ground. Tom Stafford warns that to survive, today’s companies must make a shift.
What’s Driving the Failure
According to Tom Stafford, many billion-dollar companies don’t have solid technology products or a stable profit structure. These companies are built on the venture capital ecosystem, which is not sustainable. Thus, they are destined for failure. He says, “It’s not easy to build a billion-dollar company, yet if you look at this moniker of the unicorn, it was like the last five years, unicorns were being bred as if they were not special.”
He equates these companies to the mythical horned creature. “They’re not real. A company is real when it has a viable technology that no one else has, and/or viable profits that are defensible that nobody else has. Most of the companies in the VC ecosystem are not in either of those camps,” he says.
Failure Is Imminent, But Not Necessarily Bad
In the discussion, Stafford indicates that failure is coming for thousands of companies. However, though he says there will be “weeping and gnashing” as people react in shock to these failures, he also says it’s not necessarily a bad thing. “Not every company should make it; there’s no problem with that. We should embrace failure,” he says.
Stafford indicates this is just a normal part of the economic ecosystem righting itself. “There will be thousands of companies that need to go out of business between now and the end of 2023,” he went on to say. “This is perfectly normal.”
The Tech Industry Needs to Shift
So what does this mean for the tech industry? The current success is unprecedented. The tech industry is valued at over $1.8 trillion in the United States alone. It accounts for 10% of the GDP of the nation. Demand continues to grow, too, and companies are cashing in. However, to remain sustainable while navigating economic uncertainty, tech companies must focus on five areas.
1. Embracing Agility and Adaptability
Companies that can’t change and adapt can’t survive. The tech world is constantly evolving, and companies must be able to respond accordingly. When structures and ideas need to shift, companies agile enough to make these shifts will survive.
In the case of this pending crisis, the shift needs to be away from the VC ecosystem and into a new way of doing business. In fact, companies closing and shifting financing structures could be positive for some tech companies. According to Tom Stafford, “It’s not a bad thing. Failure means we tried, we recognize that it didn’t work, and we’ve moved on to the next thing.”
2. Prioritizing Cash Flow Management
Having cash flow can be the most crucial factor in recession-proofing a company. Having money coming in and managing that money as it goes out is essential. Keeping some cash on hand for times when less cash is available is also part of managing cash flow well. Without cash flow management, companies must continue relying on VC investors, which is a recipe for failure.
3. Identifying Opportunities in Crisis
Some tech companies will come out of this pending crisis on top. Those that do will be the ones who recognize when competitors are struggling and take action. Sometimes, a company in crisis can present an opportunity for a more stable company to absorb what’s working and move forward with the struggling competitor’s tech, products, and clients. As companies close, savvy businesses will find growth opportunities.
4. Resilient Supply Chains
Tech companies face tremendous pressure to minimize time to market since launching new tech is time sensitive, and they must have their supplies to get products to customers.
In addition, companies have to strive to keep costs down. When products, such as gold and lithium, that go into tech devices increase in price, companies face lower profit margins. When manufacturing and transportation delays happen, time to market increases. Resilient, properly managed supply chains help reduce the risk of these concerns, which pushes companies closer to profitability.
5. Cultivating Customer Relationships and Loyalty
Companies that come out of this successfully either have unique tech or proven profits. Profits come through customers, and customers are fickle. They’re quick to jump on the next exciting bandwagon and leave their existing provider behind. To keep succeeding, companies will need to cultivate customer relationships that elicit loyalty from their customers. Brands with a loyal following will be more likely to have continued income and profits in the days ahead.
Change Is Coming, and Change Can Be Good
In the Bloomberg interview, Tom Stafford indicates that change is coming. However, change is not always a bad thing. Companies that can adapt and shift, build a solid tech product, and have a stable profit model will survive. This is a normal, healthy part of a growing economy, and it’s time for companies to move forward into a new economic structure, armed with the knowledge of what they need to do to survive.