Start-up workers arrived in 2022, expecting another year of money-flowing IPOs. Then the stock market collapsed, Russia invaded Ukraine, inflation rose and interest rates rose. Instead of going public, start-ups started cutting costs and laying off employees.
People also started dumping their starting stock.
The number of people and groups trying to redeem their start-up shares doubled in the first three months of the year from late last year, said Phil Haslett, a founder of EquityZen, which helps private companies and their employees sell their shares. to sell. Share prices of some billion-dollar start-ups, known as “unicorns,” have fallen 22 percent to 44 percent in recent months, he said.
“It’s the first sustained downturn in the market that people have seen in a legitimate 10 years,” he said.
That’s a sign of how the easy-money exuberance of the past decade has faded in the start-up world. Every day, warnings of an impending recession hit social media among the headlines about another round of job cuts at start-ups. And what was once seen as a sure path to immense wealth – owning start-up stocks – is now seen as a liability.
The turn went quickly. In the first three months of the year, venture capital funding in the United States fell 8 percent from a year earlier, to $71 billion, according to PitchBook, which tracks funding. At least 55 tech companies have announced or closed layoffs since the start 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 percent on May 4 from a year ago, according to Renaissance Capital, which follows IPOs.
Last week, Cameo, a celebrity app; On Deck, a career services company; and MainStreet, a financial technology start-up, all laid off at least 20 percent of their employees. Fast, a payments startup, and Halcyon Health, an online healthcare provider, have abruptly shut down in the past month. And grocery delivery company Instacart, one of the most highly regarded startups of its generation, cut its valuation in March from $40 billion last year to $24 billion.
“Everything that has been true for the past two years is suddenly not true anymore,” said Mathias Schilling, venture capitalist at Headline. “Growth at any cost is just not enough anymore.”
The start-up market has endured similar moments of fear and panic over the past decade. Each time, the market roared back and set records. And there’s enough money to keep money-losing companies afloat: Venture funds raised a record $131 billion last year, according to PitchBook.
But what’s different now is a clash of troubling economic forces coupled with a sense of reckoning with the start-up world’s frenzied behavior in recent years. A decade-long streak of low interest rates that allowed investors to take greater risks at high-growth start-ups is over. The war in Ukraine is causing unpredictable macroeconomic ripples. It seems unlikely that inflation will slow down any time soon. Even the big tech companies are faltering, with shares of Amazon and Netflix falling below their prepandemic levels.
“Out of all the times we said it feels like a bubble, I think this time it’s a little different,” said Albert Wenger, an investor with Union Square Ventures.
On social media, investors and founders have issued a steady drumroll of dramatic warnings, comparing negative sentiment to that of the dotcom crash in the early 2000s and emphasize that a relapse is ‘real’.
Even Bill Gurley, a Silicon Valley venture capital investor who has grown so tired of warning start-ups about bubbly behavior over the past decade that he gave up, is back in shape. The process of ‘unlearning’ can be painful, surprising and disturbing for many wrote in April.
The uncertainty has led some venture capital firms to halt deals. D1 Capital Partners, which participated in about 70 start-up deals last year, told its founders this year that it had stopped making new investments for six months. The company said all announced deals were closed before the moratorium, said two people with knowledge of the situation, who declined to be identified as they were not authorized to speak officially.
Other venture companies have reduced the value of their holdings to match the declining stock market. Sheel Mohnot, an investor with Better Tomorrow Ventures, said his company recently cut the valuations of seven startups it had invested in out of 88, the highest it had ever made in a quarter. The shift was sharp compared to a few months ago, when investors begged founders to take more money and spend it to grow even faster.
That fact had not yet dawned on some entrepreneurs, said Mr Mohnot. “People don’t realize the magnitude of the change that has happened,” he said.
Entrepreneurs have to deal with whiplash. Knock, a home-buying start-up in Austin, Texas, expanded its operations from 14 cities to 75 by 2021. The company planned to go public through a special acquisition company, or SPAC, with a value of $2 billion. But when the stock market became unsettled over the summer, Knock canceled those plans and made an offer to sell itself to a larger company, which it declined to disclose.
In December, the acquirer’s share price fell by half, nullifying 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 at just over $1 billion.
Throughout the roller coaster year, Knock’s company continued to grow, said Sean Black, the founder and CEO. But many of the investors he cast didn’t care.
“It’s frustrating as a company to know you’re crushing it, but they’re just responding to what the ticker says today,” he said. “You have this great story, this great growth, and you can’t fight this market momentum.”
mr. Black said his experience was not unique. “Everyone is going through this quietly, embarrassingly, shamefully and don’t want to talk about it,” he said.
Matt Birnbaum, head of talent at venture capital firm Pear VC, said companies should be careful about employee expectations around the value of their start-up stocks. He predicted a rough awakening for some.
“If you’re 35 or younger in tech, you’ve probably never seen a down market,” he said. “What you’re used to is good for your entire career.”
Startups that went public during the highs of the past two years are taking a beating in the stock market, even more than the general technology sector. Shares in Coinbase, the cryptocurrency exchange, are down 81 percent since its debut in April last year. Robinhood, the stock trading app that has seen explosive growth during the pandemic, is trading 75 percent below the IPO price. Last month, the company laid off 9 percent of its staff, accusing it of overzealous “hypergrowth.”
SPACs, which in recent years have been a trendy way for very young companies to go public, have performed so poorly that some are now going private again. SOC Telemed, an online healthcare start-up, went public with such a vehicle in 2020 and valued it at $720 million. In February, Patient Square Capital, an investment firm, bought it for about $225 million, a 70 percent discount.
Others threaten to run out of money. Canoo, an electric vehicle company that went public in late 2020, said on Tuesday it had “substantial doubts” about its ability to stay in business.
Blend Labs, a financial technology start-up focused on mortgages, was worth $3 billion in the retail market. Since it went public last year, its value has fallen to $1 billion. Last month, it said it would cut 200 employees, or about 10 percent of its workforce.
Tim Mayopoulos, the president of Blend, blamed the cyclical nature of the mortgage business and the sharp decline in refinancing that has accompanied rising interest rates.
“We look at all our expenses,” he said. “Fast-growth, money-guzzling companies are clearly not in favor from an investor sentiment perspective.”
