‘The fun is over’ with technology startups

Raising capital suddenly became difficult as venture capitalists became more stingy, forcing the startup to save and focus on breaking even.

From spending money like water, rushing to recruit and acquire, once sublimated technology startups have now been pulled back to reality. “Spend every penny as if it were the last money you have,” shared a startup CEO.

Return to the ground

In 2021, e-commerce startup Thrasio is expected to reach a value of at least 10 billion USD in a capital raising deal to go public. However, the transaction did not happen and Thrasio continued to “burn” more than $3.4 billion in raised funds. Although considered a technology company, Thrasio is limited in technology. The startup made its first $100 million without a technical team and using only Google spreadsheets. In recent weeks, Thrasio has cut nearly 20% of its workforce, appointed a new CEO, halted acquisitions and downsized projects.

Thrasio is not only facing a wave of capital withdrawals, but also increased costs of goods and advertising. Costs are choking other startups and contributing to 8,200 layoffs at US startups since March, according to a survey by Layoffs.fyi. For example, Reef Technology, which develops kitchens for food delivery in parking lots, struggled to raise $1 billion. Reef had to cut hundreds of employees, close kitchens and delay paying bills. It is revealed that Reef has signed an agreement to raise more than 250 million USD. Fast delivery startup Gopuff also wanted to raise up to 1.5 billion USD but failed. The company had to fire about 450 people, equivalent to 3% of employees.

Thrasio’s trajectory and the meteoric rise of many startups is thanks to years of low interest rates and a decline in the number of public company shares, prompting investors to turn to venture capital. Economic stimulus measures and Covid-19 relief have accelerated the trend, creating cheap cash flows that some investors have flocked to startups, as blockade orders have made digital apps and services more expensive. a far more attractive asset class.

The reversal reflects a turning point in the technology industry in general, many large funds “escape” from startups. Venture capitalists shun high valuations and demand that businesses spend less, improving profitability after years of prioritizing growth over profits. Mike Volpi, venture capitalist at Index Ventures, calls this a “rational correction, the end of a cycle.”

In March, Doug Ludlow, CEO of startup MainStreet Work, warned other founders on Twitter: “If you haven’t started the road to break even, start now. In 2022, venture capitalists will exit strongly.” He said he planned to break even in 6 months to 1 year, laying off 45 people, equivalent to one-third of the staff. “You have to spend every dollar as if it were the last dollar you have,” he said.

Investment fund with heavy loss

Venture capital exit is a necessary adjustment after years of hot growth. Investors have poured $1.3 trillion into startups over the past decade, producing hundreds of companies valued at billions of dollars and attracting interest from governments and top hedge funds.

Venture capital funds raised $132 billion to invest in startups in 2021, nearly double 2019 and six times a decade ago, when the number of funds was about a third of today. In the fourth quarter of 2021, venture capital investment hit a record $95 billion, according to data from PitchBook Data.

The amount is so large that it is difficult to deploy it wisely or effectively. Startups that raise large amounts of money and are highly valued face growth pressure and they try to realize it by rushing in recruiting and acquiring. At some companies, the quality of work has deteriorated, acquisitions are not thought through, management is distracted and burning money is increasing.

Gil Dibner, a venture capitalist in London (UK), said: “It was a mess. When you spend that much money on anything, you change the way people make decisions.”

Not only startups, public technology companies that thrived during the pandemic are also the ones that have suffered the most. This year, shares of Meta and Amazon are all down more than 30%, Apple, Microsoft and Alphabet are down about 20%, Netflix is ​​down 69%. The S&P 500 index is down 16% from the year, the Nasdaq Composite is down more than a quarter since peaking in November 2021.

With interest rates continuing to rise to combat inflation above 8%, startups that are far from profitable are becoming less and less attractive. Funds that invest both in stocks and in private companies are especially important to startups, accounting for about 70% of the money startups raise in 2021. However, some big names like Coatue Management and D1 Capital Partners have been quick. withdrew from startups when the stock market crashed, affecting their investments in public companies. In the first three months of the year, the amount of venture capital investment of such funds fell to the lowest level in six quarters.

A few days ago, SoftBank – the group that runs two startup investment funds under the Vision Fund division – recorded a loss of $ 26.2 billion in the first quarter. SoftBank said it would cut its investment by half or three-quarters of its investment. and startups. Tiger Global hedge fund, one of the strongest startup investors during the Covid-19 period, is still committed to staying in the startup market, but shifting its focus to companies in the early stages with plenty of room. growth and is not in a hurry to offer shares.

Overall, venture capital investment fell 26% in the first three months of this year compared to the last three months of 2021. From late last year to early this year, the valuations of high-growth startups fell an average of 42%, according to the report. Carta data. Venture capitalist David Sacks says the funding gap has sent Silicon Valley into its “most negative state since the dot-com boom” two decades ago.

There are many reasons to believe that the capital chaos did not lead to a collapse. The digital transformation of industries that started at the beginning of the epidemic will continue. Many startups still have abundant money and just need to save money. Similar incidents in the past have demonstrated the resilience of the technology market. For example, in 2016, investors were cold to SaaS businesses or in 2019, they were not interested in new technology companies that went public because of losses. However, history shows that the amount of investment has recovered quickly, even reaching new heights.

Former Cisco CEO John Chambers, now a venture capitalist, thinks this is a healthy phenomenon. For some other venture capitalists, they find it easier to breathe when they no longer have to compete with larger investment funds than themselves. Meanwhile, they also revoked the power given to startup founders when the market was “hot”. Transactions now have additional defenses, ensuring investors can recoup their investments in the event the startup’s valuation plunges.

According to J Zac Stein, president of human resource software startup Lattice, startups should prepare for the worst before the situation gets better.

Du Lam