Fear and loathing return to tech startups

Startup workers entered 2022 expecting another year of cash-flushed IPOs. Then the stock market crashed, Russia invaded Ukraine, inflation soared, and interest rates rose. Instead of going public, new companies began to cut costs and lay off employees.

People also started to get rid of their initial actions.

The number of people and groups trying to get rid of their initial shares doubled in the first three months of the year from the end of last year, said Phil Haslett, founder of EquityZen, which helps private companies and their employees sell their shares. Share prices of some billion-dollar startups, known as “unicorns,” have plunged 22 percent to 44 percent in recent months, he said.

“It’s the first sustained pullback in the market that people have seen in 10 legitimate years,” he said.

That’s a sign of how the quick-money effervescence of the startup world of the past decade has faded. Every day, warnings of a coming recession bounce around social media amid headlines about another round of job cuts at startups. And what was once seen as a surefire path to immense riches (owning start-up shares) is now seen as a liability.

The turnaround has been fast. In the first three months of the year, US venture funding fell 8 percent from a year earlier to $71 billion, according to PitchBook, which tracks funding. At least 55 tech companies have announced layoffs or have closed since the beginning of the year, compared with 25 this time last year, according to Layoffs.fyi, which tracks layoffs. And IPOs, the main way startups raise cash, are down 80 percent from a year ago as of May 4, according to Renaissance Capital, which tracks IPOs.

Last week, Cameo, a celebrity recognition app; On Deck, a professional services company; and MainStreet, a fintech startup, all shed at least 20 percent of their employees. Fast, a payments startup, and Halcyon Health, an online healthcare provider, abruptly closed last month. And grocery delivery company Instacart, one of the most highly valued startups of its generation, lowered its valuation to $24 billion in March from $40 billion last year.

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

The startup market has weathered similar moments of fear and panic over the past decade. Each time, the market roared back and set records. And there’s plenty of money to keep losing-money companies afloat: Venture capital funds raised a record $131 billion last year, according to PitchBook.

But what is different now is a collision of worrying economic forces combined with a sense that the start-up world’s frantic behavior of recent years must be held accountable. A decade of low interest rates that allowed investors to take greater risks in high-growth startups has ended. The war in Ukraine is causing unpredictable macroeconomic waves. Inflation seems unlikely to ease any time soon. Even the big tech companies are reeling, with shares of Amazon and Netflix falling below their pre-pandemic levels.

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

On social media, investors and founders have issued a constant drumbeat of dramatic warnings, comparing negative sentiment to that of the dotcom crash in the early 2000s and emphasizing that a pushback is “real.”

Even Bill Gurley, a Silicon Valley venture capitalist who got so tired of warning startups about bubbly behavior over the past decade that he gave up, is back on track. “The ‘unlearning’ process can be painful, surprising and unsettling for many,” he said. wrote in April.

The uncertainty has caused some venture capital firms to halt trading. D1 Capital Partners, which was involved in about 70 start-up deals last year, told founders this year that it had stopped making new investments for six months. The firm said any announced deals had been closed before the moratorium, said two people with knowledge of the situation, who declined to be identified because they were not authorized to speak officially.

Other venture firms have written down the value of their holdings to match the stock market decline. Sheel Mohnot, an investor at Better Tomorrow Ventures, said his company had recently cut the valuations of seven startups he invested in from 88, the most he had done in a quarter. The change was stark compared to just a few months ago, when investors were begging founders to take more money and spend it to grow even faster.

That fact had yet to sink in with some businessmen, Mohnot said. “People don’t realize the scale of the change that has occurred,” he said.

Entrepreneurs are experiencing whiplash. Knock, a home buying startup in Austin, Texas, expanded its operations from 14 cities to 75 in 2021. The company planned to go public through a special purpose acquisition company, or SPAC, worth $ 2 billion. But when the stock market turned shaky over the summer, Knock canceled those plans and considered an offer to sell to a larger company, which he declined to disclose.

In December, the acquirer’s share price fell by half and ended that deal as well. Knock finally raised $70 million from its existing investors in March, laying off almost half of its 250 employees and adding $150 million in debt in a deal that valued it at just over $1 billion.

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

“It’s frustrating as a company to know you’re crushing it, but they’re just reacting to what the clock is saying today,” he said. “You have this incredible story, this incredible growth, and you can’t fight this market momentum.”

Mr. Black said his experience was not unique. “Everyone is going through this quietly, shamefully and embarrassingly and they are not willing to talk about it,” he said.

Matt Birnbaum, chief talent officer at venture capital firm Pear VC, said companies would need to carefully manage workers’ expectations around the value of their initial stock. He predicted a rude awakening for some.

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

Startups that went public amid two-year highs are taking a hit in the stock market, even more so than the tech sector as a whole. Shares of cryptocurrency exchange Coinbase have fallen 81 percent since debuting in April last year. Robinhood, the stock trading app that saw explosive growth during the pandemic, is trading 75 percent below its IPO price. Last month, the company laid off 9 percent of its staff, blaming overzealous “hypergrowth.”

SPACs, which were a fashionable way for very young companies to go public in recent years, 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 percent discount.

Others are in danger of running out of cash. Canoo, an electric vehicle company that went public at the end of 2020, said Tuesday that it had “substantial doubts” about its ability to stay in business.

Blend Labs, a mortgage-focused fintech startup, was worth $3 billion in the private market. Since going public last year, its value has sunk to $1 billion. Last month, it said it would cut 200 workers, or about 10 percent of its staff.

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

“We are looking at all of our spending,” he said. “High-growth cash-burning companies, from an investor sentiment perspective, are clearly not in favor.”

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