Startup workers arrived in 2022 expecting another year of gushing initial public offerings. Then the stock market crashed, Russia invaded Ukraine, inflation skyrocketed and interest rates rose. Instead of going public, start-ups began cutting costs and laying off employees.
People also started dumping their starter stock.
The number of people and groups trying to offload their seed stocks doubled in the first three months of the year compared to the end of last year, said Phil Haslett, founder of EquityZen, which helps private companies and their employees to sell their shares. Share prices of some billion-dollar start-ups, known as “unicorns”, have fallen 22% to 44% in recent months, he said.
“This is the first sustained market pullback people have seen in 10 years,” he said.
It’s a sign of how the easy money buzz of the start-up world of the past decade has faded. Every day, warnings of a coming downturn ricochet across social media between headlines about a new round of start-up job cuts. And what was once seen as a sure path to immense wealth – owning startup stocks – is now seen as a liability.
The turn was quick. In the first three months of the year, venture capital funding in the United States fell 8% from a year earlier, to $71 billion, according to PitchBook, which tracks funding. At least 55 tech companies have announced layoffs or closures 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 exit, are down 80% from a year ago as of May 4, according to Renaissance Capital, which tracks IPOs.
Last week came Cameo, a celebrity app; On Deck, a career services company; and MainStreet, a fintech start-up, all lost at least 20% of their employees. Fast, a payment startup, and Halcyon Health, an online healthcare provider, abruptly shut down last month. And grocery delivery company Instacart, one of the most beloved start-ups of its generation, slashed its valuation to $24 billion in March from $40 billion last year.
“Everything that was true for the past two years is suddenly not true,” said Mathias Schilling, venture capitalist at Headline. “Growth at all costs is no longer enough.”
The start-up market has gone through similar moments of fear and panic over the past decade. Each time, the market came back strong and set 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’s different now is a collision of troubling economic forces combined with a sense that the frenzied behavior of the start-up world in recent years is due to a settling of scores. A decade of low interest rates that allowed investors to take greater risks on high-growth start-ups is over. The war in Ukraine is causing unpredictable macroeconomic repercussions. Inflation seems unlikely to come down anytime soon. Even big tech companies are faltering, with shares of Amazon and Netflix falling below their pre-pandemic levels.
“Of all the times we said it looked like a bubble, I think this time it’s a little bit different,” said Union Square Ventures investor Albert Wenger.
On social media, investors and founders issued a steady rhythm of dramatic warnings, comparing negative sentiment to that of the dot-com crash of the early 2000s and emphasizing that a setback is “real”.
Even Bill Gurley, a Silicon Valley venture capitalist who was so sick of warning start-ups about their fizzy behavior over the past decade that he quit, is back in shape. “The process of ‘unlearning’ could be painful, surprising and confusing to many,” he said. wrote in April.
The uncertainty has prompted some venture capitalists to suspend closing deals. D1 Capital Partners, which participated in around 70 seed deals last year, told founders this year it stopped making new investments for six months. The company said all announced deals were completed 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 capital firms have reduced the value of their holdings to match the stock market decline. Sheel Mohnot, an investor at Better Tomorrow Ventures, said his firm recently slashed the valuations of seven start-ups it had invested in out of 88, the most it had ever done in a quarter. The change has been dramatic from just a few months ago, when investors were begging founders to take more money and spend it to grow even faster.
This fact had not yet been understood by some entrepreneurs, Mr. Mohnot said. “People don’t realize the magnitude of the change that has happened,” he said.
Entrepreneurs are experiencing a boost. 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, of worth $2 billion. But as the stock market got tough over the summer, Knock called off those plans and received an offer to sell himself to a bigger company, which he declined to disclose.
In December, the acquirer’s share price fell by half and killed 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 $100 million. a billion dollars.
Throughout the year of the rollercoaster, Knock’s business has continued to grow, said Sean Black, the founder and chief executive officer. But many of the investors he introduced didn’t care.
“It’s frustrating as a business to know you’re crushing it, but they’re just reacting to whatever the ticker is saying today,” he said. “You have this incredible history, this incredible growth, and you can’t fight this market momentum.”
Mr. Black said his experience was not unique. “Everyone is going through it quietly, embarrassingly, shamefully and not wanting to talk about it,” he said.
Matt Birnbaum, head of talent at venture capital firm Pear VC, said companies should carefully manage workers’ expectations of the value of their start-up stock. He predicted a rude awakening for some.
“If you’re 35 or younger in the tech field, you’ve probably never seen a bear market,” he said. “What you’re used to is top and right of your entire career.”
Startups that went public amid the highs of the past two years are taking a beating in the stock market, even more so than the entire tech sector. Shares of Coinbase, the cryptocurrency exchange, have fallen 81% since its debut in April last year. Robinhood, the stock trading app that has seen explosive growth during the pandemic, is trading 75% below its IPO price. Last month, the company laid off 9% of its staff, blaming overzealous “hypergrowth”.
SPACs, which have been a fashionable way for very young companies to go public in recent years, have performed so poorly that some are 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 may run out of money. Canoo, an electric vehicle company that went public in late 2020, said on Tuesday it had “substantial doubt” about its ability to stay in business.
Blend Labs, a fintech startup focused on mortgages, was worth $3 billion in the private market. Since going public last year, its value has dropped to $1 billion. Last month it announced it would cut 200 workers, or about 10% of its staff.
Tim Mayopoulos, chairman of Blend, blamed the cyclical nature of mortgage business and the sharp drop in refinances that comes with rising interest rates.
“We are looking at all of our expenses,” he said. “High-growth businesses that eat money are clearly not in favor, from an investor sentiment perspective.”