We’re a quarter of the way through the 2020s and for a lot of VCs and startups, it has been a period of intense ups and downs. The digital acceleration and sky-high valuations of the pandemic years were quickly replaced by the geopolitical unrest, economic uncertainty, and repricing, which has defined the last 18 to 24 months, and looks set to continue this year. Many VCs and founders have never experienced such a rapid shift, and it has sparked numerous challenges, as well as soul searching and a reassessment of how to build great businesses.

But pressure creates diamonds, and the sector will emerge stronger and more resilient from these turbulent years. Here are five key lessons that VCs and startup founders will take from the early 2020s:

• Too much capital encourages unsustainable business models

An abundance of capital was invested in startups between 2019 and 2022, with 2021 reaching a record $621 billion, doubling the previous year. Low interest rates and rapid uptake of digital services meant investor confidence was through the roof, leading to more competition for ‘promising’ startups, and inflated valuations. Added to that, stimulus packages and funding from governments, especially during COVID-19, played a significant role in distorting market dynamics, by providing a safety net for startups, some of which lacked the fundamentals for long-term success.

All in all, the environment was perfect for propping up unsustainable business models and encouraging rapid scaling at the expense of real value and profitability. Looking back at failures such as WeWork, Gorillas, and Bird, the problems seem obvious now. But investors overlooked them and kept plowing money in, scared of missing out on the chance of making it big. The lesson? Beware of FOMO and stick to your knitting, stay disciplined, and don’t steer away from the playbook.

• Being a successful entrepreneur requires more than a big idea

Starting and running a business is far easier when you’re propped up by a comfortable buffer of cash and the boom of the early 2020s masked widespread skills gaps amongst founders. Many entrepreneurs during this period lacked essential skills and experience in areas such as sales and marketing and cash flow management, which are vital for building sustainable businesses. Now that the market has turned, you can see who really has what it takes, and who was just a ‘tourist founder’, there for the good times. This has brought a renewed appreciation that building companies is hard, and in most cases, success comes from backing seasoned founders with a deep understanding of market dynamics, building teams, and the resilience to navigate tougher times. Charisma alone is not enough.

• Due diligence is non-negotiable

At the height of the 2021 boom, it wasn’t unusual for investors to present term sheets on a first meeting, following minimal or no due diligence. Much of this culture was driven by non-traditional venture investors with billions to burn, but FOMO and impatience spread throughout the sector. As you might expect, many of these deals turned out to be ill-advised, leading to embarrassment and huge losses, as teams and business models failed to live up to inflated expectations (and valuations!) But on the plus side, this period has reaffirmed the importance of thorough due diligence; of VCs spending time with the team, asking the right questions, and scrutinising the product, business model, finances, and KPIs, to ensure they understand the core metrics. Proper due diligence could take up to six or nine months in total and having this time to build trust and mutual understanding between investors and entrepreneurs is critical for long-term success.

• Return to venture craftsmanship

These ‘night club term sheets’ were also symptomatic of a broader problem of recent years, which was that many investors treated venture investing like the stock market, believing they could purchase shares, sit back, and wait for the returns to roll in. During the 2019 to 2022 period, the new VCs coming into the sector were in it for the wrong reasons, and they brought an impatience factor to the game, which is contrary to how experienced VCs usually operate.

What true VCs have always known is that early-stage venture investing is a long game, requiring patience, persistence, and significant hands-on support, not just financial backing. As a VC, challenges and problems are part of the journey, and overcoming them requires active mentorship and guidance, in the form of VCs’ experience and expertise, plus their networks of facilitators and subject matter experts.

VC is an apprentice business, which requires you to develop both hard and soft skills through working with entrepreneurs, in different economic climates, throughout the venture capital cycle. Not everyone is cut out for a career in VC, as it demands a unique blend of skills and behaviors, such as curiosity, resilience, humility, self-awareness, and empathy, along with technical knowledge of financial tools, technology, and legal. It is a balance of having the right inherent behaviors and the time to develop market knowledge and experience.

• Embrace crisis

The current market reset has put a premium on resilience, both in startups and venture firms. There is a greater appreciation of the entrepreneurial journey and an understanding that enduring ventures are built over time and through challenges. Facing difficult times can be the maker of great businesses by forcing founders to search for cost-efficient solutions, make tough decisions, seize opportunities, or become leaner and faster.

In a crisis, it is the individual, not the government or corporate partner that makes the difference and this strengthens the partnership between the entrepreneur and the hands-on VC, who has the skills and experience to provide real support. A crisis provides a chance to surface issues that might not otherwise be discussed and encourages constructive debate about weaknesses, direction, competitive threats, or new technologies in the market. Recognizing and addressing these risks enables a business to start cash planning, and affords them time to pivot, or change the team – making them stronger. Rather than fearing crisis, VCs and founders should be ready to embrace it.

Huge opportunities ahead

Despite a plethora of challenges, the current era is still considered one of the best times to invest in technology and start-ups. Digital transformation that accelerated during the pandemic continues at speed, and technology remains key to solving the world’s biggest problems, through creating entirely new sectors, while transforming traditional areas, such as healthcare, financial services, and manufacturing. But maximizing these opportunities means learning the lessons of the last few years – moving away from illusory valuations driven by FOMO and media frenzy, and returning to the fundamentals of great investing, and real sustainable growth.

Originally Posted on Forbes

Read more articles and news items from the team