The Return of Operational Discipline in Startups
Focus on your business fundamentals to succeed in the new normal
For the last 13 years, the startup world has been defined by a “growth at all costs” mentality. Fueled by historically low-interest rates and an abundance of venture capital, founders focused obsessively on hypergrowth, user acquisition, and raising at all costs. Profitability and unit economics often took a backseat.
However, the tides are now turning (or have been for those paying attention). In 2023, we are seeing a shift towards more intentional, disciplined growth. This new operational focus is largely driven by tighter access to capital. With rising interest rates and cooling VC funding, the era of cheap capital is over. Founders can no longer rely on endless rounds of funding without proving sustainability.
The decade following the 2008 recession was defined by easy money. Interest rates sat at rock-bottom levels, allowing investors to borrow cheaply. Yield-hungry investors began pouring money into venture capital funds. As a result, VC funds amassed war chests of capital to deploy. And why not - markets are bigger than people think and valuations just keep going up.
Flush with this cheap capital, VCs became less disciplined about investing. Growth, storytelling, and vanity metrics were prioritized over business fundamentals like margins, profit, and efficiency. Companies stayed private longer, raised more capital, and delayed the public debuts (which may continue). Loss-making companies had easy access to funding as larger VC funds investing across stages sought places to park capital. More on this topic here.
Founders then bought into the belief that capital would always be abundant. The prevailing mindset was to focus aggressively on growth because even if you burned more to get there, someone would fund you. There were always more investors to pitch.
But times have changed and may never return. Interest rates are rising across the globe, making capital more expensive. Acquirers are wary of overpriced vaporware purchases. LPs are longing for the distributions promised to them from their private fund managers as their public books, down 10-50%, cause portfolio construction migraines. And private investors are becoming risk-averse and selective with where they deploy money, unsure when they’ll next be able to raise their own next fund.
This means founders can no longer rely on endless VC funding without proving their business models. Efficiency and sustainability are now crucial. Founders need to extend their runway and have a path to profitability. Growth at all costs is being replaced by an intentional, operational focus. When I started my career in venture, we used to always ask ourselves "Could this be the last round of funding this company needs?” Then for years, it was an irrelevant question. But time is a flat circle.
In this tighter funding environment, founders don’t know where the next round of capital will come from — or if it will come at all. They need to manage costs intelligently and run an efficient ship. Operational discipline is critical for startups across all stages. But each stage, from seed to publically traded company, needs to understand what metrics need to be measured and when. Companies that master it will be positioned to weather decades to come.
Put your investors to work. In this new era, founders should be begging investors to help instill financial and operational diligence within their portfolio companies. By emphasizing metrics, budget transparency, and thoughtful growth, they can set startups up for sustainability.
Some ways VCs can promote discipline include:
Implementing Metrics Tracking: Investors should agree on a metrics reporting framework with each startup to track KPIs and business fundamentals. No matter the cadence (monthly, quarterly, or more frequently), make the practice a habit.
Building Financial Dashboards: Shared dashboards that track burn rate, cash flows, and runway projections help keep companies accountable for their budget goals. Sharing some of this with employees or managers can also help align your team and allow them to understand why traveling business class for a meeting that could be a Zoom will no longer fly.
Coaching on Efficiency: Investors can regularly audit startup spending and processes to recommend ways to increase efficiency, whether it be tools, systems, or workflows. Most VCs see hundreds or thousands of companies and work closely with tens or hundreds. Getting a horizontal perspective should be table stakes.
Promoting OKRs and Goal-Setting: Objectives and key results (OKRs) help startups align around measurable goals across departments — beyond just growth goals. Some people argue that OKRs are distractions and slow companies down - but even the process of planning and outlining OKRs can produce discipline.
Instilling Budget Rigor: If you haven’t seen this year, you can bet it’s coming. Startup budgets and plan enforcement will likely become more prominent as the year-end budgeting cycles approach. Force your teams to justify and prioritize costs. If you’re bloated and don’t know where to start cutting, try Zero-Based Budgeting.
You wouldn’t build a house without a solid foundation. Why scale a business without the proper infrastructure? Measure what you can and monitor changes as you scale - you’ll likely notice areas of improvement or levers for growth before
With this operational diligence, founders can optimize for sustainable growth without sacrificing discipline and while burning less cash. Of course, efficiency is only one part of the puzzle — choosing the wrong market or building the wrong product won’t be solved by metric tracking. But it will become clear sooner. For funded startups, tight alignment on financial discipline gives them the best shot at building an enduring business. It doesn’t mean you shouldn’t shoot for the moon, but don’t build the rocket mid-launch.