What does this mean for today’s startups and their investors? Are unicorns destined to return to being mythical?

The positive news is that investments are still being made. However, what attracts venture capitalists has changed dramatically – no longer is it about ‘blitz scaling’ to create first-mover advantage, an approach that resulted in significant cash burn and limited or no profits. Instead, startups must focus on the bottom line, retain customers, and maximise operational efficiency.

Based on our experience, we see six key dimensions that startups need to focus on if they are to become unicorns in today’s changed environment.

1. Aim for category or technology leadership in your target segment

Nowadays, product-market fit is not enough. Instead, customers and investors are looking for ‘insane product-market fit,’ essentially 95% or more targeted customers should find the product or service offering compelling compared to alternatives. This will drive longer, deeper customer relationships, lower churn rates and net positive customer lifetime values.

On the operations side, businesses should look to build a more efficient, asset-light model. Startups that finesse their product and service and build lean, cost-effective business models will not just weather this prolonged winter, but eventually flourish and thrive.

2. Look beyond the usual segments and markets

The majority of startups begin their journey with pilots targeting specific, familiar markets – for example, B2C tier 1 cities and affluent consumers or B2B large corporates. This results in increasing hyper-competition to grab wallet share of customers in these segments.

Yet multiple industries and customer segments remain underserved. Startups should therefore target these new addressable markets, such as tier-2 cities, SMEs, or areas such as Environmental Social and Governance (ESG).

3. Take a new approach to customer acquisition and retention

Rather than scattergun spending of large marketing budgets to attract customers, startups need to adopt more targeted tactics. That means shifting spend from above-the-line activities such as advertising and sponsorship to below-the-line tactics with growing focus on referrals and word of mouth.

Once customers are onboard, the emphasis must be on retention and upselling, rather than headline acquisition numbers. Investors are now focussed on metrics such as monthly active users (MAUs) and time spent per session, rather than app downloads.

4. Focus on pricing and long-term monetisation of customers

Previously, many startups based their revenue models on ‘freemium’ or ad-based approaches. Neither of these deliver the revenue certainty that investors are demanding. The focus on customer retention means that subscription-based revenue models have come into fashion once again.

However, these subscription-based offerings should be flexible to keep pace with changing customer needs and demonstrate clear value. For instance, beauty and personal-care companies are increasingly using a razor and-blade pricing model in which the main product offered is cheap, but additions/refills are relatively expensive.

5. Build a technology-enabled, customer-centric support model

While they’ve often claimed to be customer-centric, many startups have not carried this promise through from product creation to customer service. The focus on top-line growth model meant retaining existing customers was not a priority.

High-quality service is essential to customer retention and maintaining market share. However, providing this customer service in-house has traditionally been a labour- and cost-intensive function that grows in tandem with market share. To break this link, startups should look at technology, particularly digital channels, AI, and natural language processing (NLP), to automate customer service through chatbots and NLP-powered online FAQs.

6. Different tech workforce management

Most startup founders are based in cities established as startup hubs, such as the Bay Area in the US, Bengaluru (Bangalore) in India, Paris in France, or London/Cambridge in the UK. As they grow, they naturally expand their operations and teams in the same location. However, the rising popularity of these areas has driven increases in the cost of living and real-estate prices. For example, the cost of housing in San Francisco is no less than 238% higher than the US average. All of this results in higher salaries and operating costs.

Therefore, as startups expand, they should create centres in emerging hubs (such as Denver, Colorado and Austin, Texas in the US, or Hyderabad and Pune in India) where the cost of operations is relatively low. Additionally, startups located in developed countries should outsource operations to countries such as India, Poland, or Romania, where a highly qualified talent pool is available at a much lower cost.

Today’s funding winter is far from being simply a bad news story. It has provided a welcome driver for startups to focus on profitability and creating world-class businesses, rather than just growing the top line. They need to use the slowdown as a positive, removing extra fat from the organisation and making their businesses lean and IPO ready, if they want to genuinely achieve lasting unicorn status in the future.