Fear and delirium return to tech start-ups

Start-up workers entered 2022 expecting another year of rushing initial public offerings. Then the stock market crashed, Russia invaded Ukraine, inflation has soared, and interest rates have risen. Instead of going public, start-ups started cutting costs and firing employees.

People have also started downloading their start-up shares.

The number of individuals and groups attempting to offload their start-up shares has doubled in the first three months of the year from the end of last year, said Phil Haslett, one of the founders of EquityZen, which helps private companies and companies. their employees to sell their shares. The share prices of some billion-dollar startups, known as “unicorns,” have plummeted from 22% to 44% in recent months, he said.

“It is the first sustained withdrawal in the market that people have legitimately seen in 10 years,” he said.

This is a sign of how the easy money boil in the start-up world of the last decade has vanished. Every day, warnings of an impending recession bounce on social media amid the headlines of another round of job cuts for startups. And what was once seen as a surefire path to immense wealth – owning start-up shares – is now seen as a liability.

The turning point was rapid. In the first three months of the year, venture capital funding in the United States fell 8% from the previous year, to $ 71 billion, according to PitchBook, which tracks the funding. At least 55 tech companies have announced layoffs or closures since the beginning of the year, compared to 25 this time last year, according to layoffs.fyi, which monitors layoffs. And IPOs, the primary way startups make money, plummeted 80% from a year ago to May 4, according to Renaissance Capital, which follows IPOs

Last week, cameo, an app to celebrate celebrities; On Deck, a career services company; and MainStreet, a financial technology start-up, all lose at least 20% of their employees. Veloce, a payments start-up, e Halcyon health, an online health care provider, has abruptly shut down in the past month. And the grocery delivery company Instacart, one of the most respected start-ups of its generation, he cut his rating to $ 24 billion in March from $ 40 billion last year.

“Everything that has been true over the past two years is suddenly not true,” said Mathias Schilling, a venture capitalist at Headline. “Growth at any price is no longer enough”.

The start-up market has withstood similar moments of fear and panic over the past decade. Whenever the market roared again and set records. And there’s a lot of money to keep loss-making companies afloat – venture capital funds raised a record $ 131 billion last year, according to PitchBook.

But what’s different now is a collision of troubling economic forces coupled with the feeling that the fast-paced behavior of the start-up world in recent years is due to a showdown. A decade-long run of low interest rates that allowed investors to take more risk on high-growth startups is over. The war in Ukraine is causing unpredictable macroeconomic ripples. It seems unlikely that inflation will subside anytime soon. The big tech companies are also faltering, with shares in Amazon and Netflix dipping below their prepandemic levels.

“Of all the times we’ve said it looks like a bubble, I think it’s a little different this time,” said Albert Wenger, a Union Square Ventures investor.

On social media, investors and founders have issued a steady drum beat of dramatic warnings, comparing negative sentiment with that of the dot com crash of the early 2000s and pointing out that a withdrawal is “real”.

Even Bill Gurley, a Silicon Valley venture investor who has grown so tired of warning startups about bubbly behavior over the past decade that he gave upis back in shape. “The ‘unlearning’ process could be painful, surprising and disturbing for many,” he said he wrote in April.

Uncertainty has led some venture capital firms to suspend the conclusion of agreements. D1 Capital Partners, which participated in around 70 start-up deals last year, told the founders this year that it had stopped making new investments for six months. The company said all the deals announced had been reached before the moratorium, two people aware of the situation said, who refused to be identified because they weren’t allowed to speak on the minutes.

Other venture capital firms lowered the value of their holdings to match the decline in the stock market. Sheel Mohnot, an investor at Better Tomorrow Ventures, said his company recently reduced the valuations of seven startups he invested in to 88, the most he had ever made in a quarter. The change has been strong compared to just a few months ago when investors were initial founders take more money and spend it to grow even faster.

This fact was not yet ingrained in some entrepreneurs, Mr. Mohnot said. “People don’t realize the extent of the change that has happened,” he said.

Entrepreneurs are experiencing whiplash. Knock, a home-buying start-up in Austin, Texas, expanded its operations from 14 cities to 75 in 2021. The company planned to go public via a special purpose acquisition company, or SPAC, valuing it at $ 2 billion. But when the stock market got tough over the summer, Kno canceled those plans and entered into an offer to sell himself to a larger company, which he declined to disclose.

In December, the buyer’s stock price dropped by half and he canceled that deal as well. Knock eventually raised $ 70 million from its existing investors in March, laid off nearly half of its 250 employees, and added $ 150 million in debt in a deal that valued it just over $ 1 billion.

Throughout the roller coaster year, Knock’s business continued to grow, said Sean Black, founder and CEO. But many of the investors he proposed didn’t care.

“It’s frustrating as a company to know you’re squashing it, but they’re just reacting to whatever the ticker says today,” he said. “You have this amazing history, this incredible growth and you can’t fight this market momentum.”

said Mr. Black your experience it was not unique. “Everyone is facing this in a calm, embarrassing, shameful way and they are not willing to talk about it,” he said.

Matt Birnbaum, head of talent at venture capital firm Pear VC, said companies should carefully manage workers’ expectations regarding the value of their startup shares. For some he predicted a rude awakening.

“If you’re 35 or under in tech, you’ve probably never seen a bear market,” he said. “What you are used to is up and to the right of your entire career.”

Start-ups that went public among the highs of the past couple of years are being pummeled in the stock market, even more so than the tech sector in general. Shares of Coinbase, the cryptocurrency exchange, have fallen 81% since its debut in April last year. Robinhood, the stock trading app that experienced explosive growth during the pandemic, is trading 75% below its IPO price. Last month, the company 9 percent of its staff firedblaming the excessive “overgrowth”.

SPAC, who were a fashionable fashion for very young companies that have gone public in recent years, they have performed so poorly that some are now going private again. SOC Telemed, an online healthcare startup, went public using such a vehicle in 2020, valuing it at $ 720 million. In February, Patient Square Capital, an investment firm, bought it for about $ 225 million, a 70% discount.

Others risk running out of money. Canoo, a publicly traded electric vehicle company in late 2020, She said Tuesday that he had “substantial doubts” about his ability to stay in business.

Blend Labs, a mortgage-focused financial tech start-up, was worth $ 3 billion in the private market. Since it went public last year, its value has dropped to $ 1 billion. Last month, it said it would cut 200 workers, or about 10% of its staff.

Tim Mayopoulos, president of Blend, blamed the cyclical nature of the mortgage business and the sharp decline in refinancing that accompanies rising interest rates.

“We are looking into all of our expenses,” he said. “High-growth liquidity-burning assets are clearly not favorable from an investor sentiment standpoint.”