Fear and loathing return to tech startups

Startup workers came into 2022 anticipating another year of initial public offerings that poured cash. Then the stock market collapsed, Russia invaded Ukraine, inflation swelled, and interest rates rose. Instead of going public, startups started cutting costs and laying off employees.

People started dumping their startup stocks, too.

Phil Haslett, founder of EquityZen, which helps private companies and their employees sell their shares, said the number of people and groups trying to offload startup stock doubled in the first three months of the year compared to late last year. He said the share prices of some billion-dollar startups known as “unicorns” have fallen 22 percent to 44 percent in recent months.

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

This is a sign of how easy financial enthusiasm for the novice world has faded in the past decade. Every day, warnings of an upcoming downturn mount across social media among the headlines about another round of job cuts at startups. What was once seen as a sure-fire path to massive fortunes – owning startup stocks – is now seen as a drag.

The turn was fast. In the first three months of the year, project funding in the United States was down 8 percent from a year earlier, to $71 billion, according to PitchBook, which tracks funding. At least 55 tech companies have announced layoffs or shutdowns since the beginning of the year, compared to 25 around this time last year, according to Layoffs.fyi, which monitors layoffs. IPOs, the main way out of startups, are down 80 percent from a year ago through May 4, according to Renaissance Capital, which tracks IPOs.

Last week, Cameo, an app that screams celebrities; On Deck, a professional service company; And MainStreet, a fintech startup, has all laid off at least 20 percent of its staff. Fast, the payments startup, and Halcyon Health, an online healthcare provider, abruptly shut down last month. And grocery delivery company Instacart, one of the most valuable startups of its generation, cut its value to $24 billion in March from $40 billion last year.

“Everything that has happened in the past two years has suddenly become untrue,” said Matthias Schilling, venture capitalist at Headline. “Growth at any cost is not enough anymore.”

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

But what is different now is the collision of worrisome economic forces along with the sense that the frenetic behavior in the startup world of the past few years has been due to calculus. A long decade of low interest rates that enabled investors to take greater risks on high-growth startups is over. The war in Ukraine is causing unpredictable macroeconomic ripples. It seems unlikely that inflation will abate anytime soon. Even the big tech companies are floundering, with shares of Amazon and Netflix dropping below their pandemic levels.

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

On social media, investors and founders sounded a steady drumbeat of dramatic warnings, comparing negative sentiment with those of The dotcom crash in the early 2000s Emphasizing that the withdrawal is “real”.

Even Bill Gurley, a Silicon Valley venture capital investor so tired of warning startups about bubbly behavior over the past decade that he gave up, is back on track. “The process of ‘not learning’ can be painful, surprising and disconcerting to many” books in April.

The uncertainty has caused some venture capital firms to pause dealmaking. D1 Capital Partners, which was involved in nearly 70 start-up deals last year, told founders this year that it had stopped making new investments for six months. The company said any announced deals were made prior to the moratorium, two people familiar with the situation said, who asked not to be identified because they were not authorized to speak publicly.

Other venture companies have reduced the value of their holdings to match the stock market’s slump. Shel Mohnot, an investor at Better Tomorrow Ventures, said his company recently lowered the valuations of seven startups it has invested in out of 88, the most in a quarter. The shift was stark compared to just a few months ago, when investors were begging founders to make more money and spend it to grow faster.

Mr. Mohnot said that fact has not yet taken hold with some entrepreneurs. “People don’t realize how much has changed,” he said.

Entrepreneurs suffer injury. Knock, a home-buying startup in Austin, Texas, expanded its operations from 14 cities to 75 in 2021. The company planned to go public via a $2 billion Special Purpose Acquisition Corporation, or SPAC. But as the stock market swung over the summer, Knock canceled those plans and made an offer to sell himself to a larger company, which he declined to disclose.

In December, the buyer’s share price fell by half and that deal was also killed. Noc 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 valued at just over $1 billion.

Over the course of a roller coaster year, Noc’s business continued to grow, said Sean Black, founder and CEO. But many of the investors he proposed did not care.

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

Mr. Black said his experience was not unique. “Everyone is going through this quietly, embarrassed, and shameful, and they don’t want to talk about it,” he said.

Matt Birnbaum, head of talent at venture capital firm Pear VC, said companies will have to carefully manage workers’ expectations about the value of their startup stocks. He predicted a brazen awakening for some.

“If you are 35 or younger in technology, you have probably never seen a bear market before,” he said. “What you’re used to is right your entire career.”

Startups that have gone public amid the highs of the past two years are taking a huge hit in the stock market, even more so than the tech sector in general. Shares of Coinbase, the cryptocurrency exchange, have fallen 81 percent since it debuted in April of last year. Robinhood, the stock trading app that has seen explosive growth during the pandemic, is trading 75 percent below its IPO price. Last month, the company laid off 9 percent of its employees, blaming it on “excessive growth.”

SPACs, which have been a fashionable way for very small companies to go public in recent years, have performed so poorly that some are now private again. SOC Telemed, an online healthcare startup, released such a vehicle to the public in 2020, valuing it at around $720 million. In February, it was bought by Patient Square Capital, an investment firm, for about $225 million, at a 70 percent discount.

Others are in danger of running out of money. Canoo, the electric car company that went public in late 2020, said Tuesday it had “high doubts” about its ability to continue to operate.

Blend Labs, a fintech startup focused on mortgages, has been valued at $3 billion in the private market. Since it went public last year, its value has slumped to $1 billion. Last month, it said it would cut 200 workers, or roughly 10 percent of its staff.

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

“We are looking at all of our expenses,” he said. “Obviously, high-growth cash-burning businesses, from the investor’s point of view, are not in favor.”

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