Bilal Zuberi, a partner at venture capital firm Lux Capital, has spent the past few weeks sharing an unsettling message with the founders of the companies he invests in. Startups need to start cutting costs, which almost always means cutting jobs. “The world is falling apart. And we need to act.”
Unlike Zuberi, 46, many of the people he’s trying to send this message to have never experienced a significant contraction in the tech industry. When told the CEO of a company with hundreds of employees that the business was no longer worth the billion-dollar valuation it received in its most recent funding round, Zuberi said, the founder reacted. respond with “confusion, fear, and denial”.
In recent years, the CEO has heard other predictions that dire times are receding, but things have never really been this bad. Zuberi declined to name the founder or company because the conversation was private.
During more than a decade of an incredible bull market fueled by the tech industry boom, there have been periodic warnings that the good times are over. In a widely circulated essay from two years ago titled “Coronavirus: The Black Swan of 2020,” venture capital firm Sequoia Capital warned startups to question every aspect. their business edge, including the level of personnel and whether they have access to long-term capital. They advise: “Nobody should regret making quick and decisive adjustments to changing circumstances.”
“Companies don’t die from bad products. They die from running out of money”
However, after the initial panic that spring, many tech companies thrived during the pandemic, when interest rates were low, markets skyrocketed, and consumer behavior changed dramatically. than any disruption caused by Covid-19. Zuberi said this false alarm made it difficult for startup founders to accept the gravity of the current situation this spring.
But reality is happening now. The stock market tumbled in early May, combined with the escalating Russia-Ukraine conflict, domestic inflation and the pandemic now entering its third year. It’s all starting to cause significant pain for later-stage startups, and it looks like it will hit smaller companies in the coming months.
Investors have not lost faith in their ability to reshape every nook and cranny of the world economy. But the financial system also has a say. “Companies don’t die from a bad product,” says Zuberi. They die from running out of money. After initial outcry, the founder who questioned Zuberi’s advice began preparing to cut costs by 20% to 30%, eliminate some job positions, and raise money at a fixed rate. price is lower than the company’s previous value.
Welcome to the recession of 2022, where the path from tiny startup to billion-dollar monster suddenly becomes harder. According to researcher CB Insights, this quarter, the number of tech companies going public was at the lowest level since 2016. According to researchers at PitchBook Data Inc., shareholders of the companies Thriving private tech companies like Stripe Inc. and Instacart Inc. has lost about half of its value this year.
Globally, fundraising slowed, with large volumes ($100 million or more) and total raised falling in the first quarter – the first time that happened in nearly two years. “Investor sentiment in Silicon Valley is at its most negative since the dot-com crash 20 years ago,” PayPal co-founder David Sacks, now a partner at investment firm Craft Ventures, said. write on Twitter.
Nina Achadjian, a partner at Index Ventures, says startups must learn to adjust right away. “Last year nobody needed a backup plan,” she said. “It’s growth at all costs and capital is easy to come by.” Her company is telling founders to shift their focus to sustainability even if it slows growth, be cautious about hiring, and make sure they have enough cash to operate for 18 years. up to 24 months.
The market trend is just starting to hold. Kyle Stanford, an analyst at PitchBook, said that just 5% of the investments completed in the third quarter were at a discount, meaning the company accepted a lower valuation than previous deals.
Venture capitalists, by their very nature optimists, have been conversing with each other. Vinod Khosla of Khosla Ventures said: When large public companies cut back, the first thing they stop doing are innovative ideas that take years to come to fruition. This response creates opportunities for new founders and early startups, he said, and at the same time market conditions make it cheaper for many startups to invest in. More reasonable pricing. We can take more risks,” he said.
There is still a lot of money waiting for startups. According to PitchBook, US venture capitalists invested more than $230 billion in mid-May. More than 1,000 startups raised capital from seed and angel investors in the third quarter, pushing up the total price. The value of early-stage deals is at its highest level in at least a decade.
“The market isn’t right for early-stage companies with strong founders and teams,” said Karan Kundra, founder of a health tech startup in San Francisco. Kundra, 25, said he has been talking to investors since early May to raise about $2 million and has received 12 offers.
Changes in the market can eventually work out for investors and founders who can afford to be patient, but it doesn’t mean much for the thousands of tech workers who recently lost their lives. job. Venture-backed startups including cloud kitchen operator Reef Technology, grocery delivery company Avo and artificial intelligence firm DataRobot have cut more than 7,500 jobs globally since January 1. May 4 to May 16, according to employment tracking company Layoffs. Public companies have also cut jobs, stopped hiring, or done both.
Many have been stunned by how quickly their seemingly steady employment in a thriving industry has evaporated. Michelle Kneibel, a weight loss coach for the startup Noom, was chatting with her colleagues on Slack one day in late April while they waited to join a video conference.
She’s skeptical when people’s names and posts start to disappear. Minutes later, in a private meeting, she learned that she had lost her job. A company spokesman declined to comment.
Within weeks, Noom had let go of 495 employees. The company raised $540 million last year and recently improved employee benefits, cut health insurance deductibles and increased paid time off. Late last year, Noom said the company also sent employees a branded t-shirt and hat to celebrate the achievement. “I don’t understand this change,” she said. “I’m shocked”.
A few days after losing his job, Kneibel received a package in the mail containing a belated holiday gift from the company. The gift came with a note acknowledging the delay but making no mention of the mass layoffs. In the current circumstances, the note from the company seems to carry a different meaning: “This is the last thing”.