Start-up workers arrived in 2022 with the expectation of a second year of cash-gushing initial public offering. Then the stock market plummeted, Russia invaded Ukraine, inflation soared and interest rates soared. Instead of going public, start-ups began cutting costs and laying off employees.
People also started dumping their start-up stock.
The number of people and groups trying to unload their start-up shares has doubled in the first three months of the year since the end of last year, said Phil Haslett, founder of Equitizen, which helps private companies and their employees sell their stock. Share prices of some billion-dollar start-ups, known as “Unicorn”, have fallen from 22 percent to 44 percent in recent months, he said.
“It’s the first continuous pullback in the market that people have seen legally in 10 years,” he said.
It’s a sign of how the start-up world’s easy-money zeal has faded over the last decade. Every day, bearish warnings on social media amid headlines about the second round of start-up job cuts. And what was once seen as a fixed path to abundant prosperity – owning start-up stock – is now seen as a liability.
The turn has come quickly. In the first three months of the year, venture funding in the United States fell 8 percent to $ 71 billion from a year earlier, tracking funding. Since the beginning of the year, at least 55 tech companies have announced layoffs or shutdowns 25 This time last year, according to Layoffs.fyi, which monitors layoffs. And IPOs, the main route for start-ups to cash out, fell 80 percent a year earlier as of May 4, according to Renaissance Capital, which follows the IPO.
Last week, Cameo, a celebrity shout-out app; On deck, career-service company; And Mainstreet, a financial technology start-up, has all lost at least 20 percent of its employees. Halcyon Health, a fast, payments start-up and online healthcare provider, abruptly shut down last month. And grocery delivery company Instacart, one of the most valuable start-ups of its generation, cut its valuation in March from $ 40 billion last year to $ 24 billion.
“Everything that has been true in the last two years is not suddenly true,” said Matthias Schilling, headline venture capitalist. “Growth at any cost is not enough now.”
The start-up market has faced similar moments of fear and panic over the past decade. Each time, the market roared and set a record. And there’s plenty of money to keep lost companies afloat: Venture capital funds raised a record $ 131 billion last year, according to Pitchbook.
But what is different now is that the frantic behavior of the start-up world over the last few years is for a calculation, a clash of the economic forces in trouble connected with the meaning. A decade-long movement of low interest rates that enabled investors to take big risks on high-growth start-ups. The war in Ukraine is causing an unexpected macroeconomic ripple. Inflation is unlikely to fall anytime soon. Shares of Amazon and Netflix are also faltering as big tech companies fall below their pre-epidemic levels.
“We said it sounds like a bubble, I think this time is 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 emotions. Dot-com crashes in the early 2000s And emphasizes that the pullback is “real”.
Even Silicon Valley venture capital investor Bill Gurley, fed up with warning start-ups over the past decade about bubbly behavior that he left, has returned to form. “The ‘uneducated’ process can be painful, surprising and upsetting for many,” he said. Wrote In April.
Some venture capital firms have stopped making deals due to uncertainty. D1 Capital Partners, which participated in about 70 start-up deals last year, told founders this year that it has stopped making new investments for six months. The firm said any deal being announced was struck before the moratorium, said two people with knowledge of the situation, who declined to be identified because they were not authorized to speak on the record.
Other venture companies have reduced the value of their holdings to match the declining stock market. Shil Mohanot, an investor at Better Tomorrow Ventures, said his firm had recently downgraded its investment in seven of the 88 start-ups, the most it had ever done in a quarter. The shift was quite solid compared to just a few months ago, when investors were urging the founders to take more money and spend it for faster growth.
That fact had not yet sunk with some entrepreneurs, Mr. Mohanty said. “People don’t realize that change has come,” he said.
Entrepreneurs are experiencing whiplash. A home-buying start-up in Knock, Austin, Texas, it has expanded its operations from 14 cities to 75 in 2021. The company plans to go public through a special purpose acquisition company or SPAC, valued at 2 billion. But as the stock market turned rocky over the summer, Nok canceled those plans and accepted an offer to sell to a larger company, which he refused to disclose himself.
In December, the acquirer’s share price fell by half and the deal ended. Noke finally raised $ 70 million from its existing investors in March, laid off about half of its 250 employees and added $ 150 million in debt to a deal valued at more than $ 1 billion.
In the roller-coaster year, Knock’s business continued to grow, said Sean Blake, founder and chief executive. But many investors did not care.
“It’s frustrating as a company to know you’re crushing it, but they’re reacting to what Ticker says today,” he said. “You have this wonderful story, this wonderful growth, and you can’t keep up with the pace of this market.”
Mr. Blake said his experience was not unique. “Everyone is going through this quietly, shamefully, shamefully and not willing to talk about it,” he said.
Matt Bernbaum, head of talent at venture capital firm Pierre VC, said companies need to carefully manage workers’ expectations around the value of their start-up stock. He predicted a barbaric awakening for some.
“If you’re 35 or under, you’ve probably never seen a down market,” he said. “What you are used to is your whole career is right and proper.”
Start-ups that have come to the fore between the highs of the last two years are gaining ground in the stock market, even more than the overall tech sector. Shares of Coinbase, a cryptocurrency exchange, have fallen 81 percent since its inception in April last year. Robinhood, a stock trading app that made explosive growth during the epidemic, is trading 75 percent below its IPO price. Last month, the company fired 9 percent of its employees, blaming it for “hypergrowth”.
SPAC, which has been a trendy way for very young companies to go public in recent years, has performed so poorly that some are now going private again. SOC Telemed, an online health care start-up, went public in 2020 using such a vehicle, valued 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. Kanu, an electric vehicle company that went public in late 2020, said on Tuesday it had “significant doubts” about its ability to stay in business.
Blend Labs, a mortgage-focused financial technology start-up, was valued at 3 billion in the private market. Since its announcement last year, it has been valued at 1 billion. Last month, it said it would cut 200 workers or about 10 percent of its staff.
Tim Mayopoulos, president of Bland, blamed the cyclical nature of the mortgage business and the sharp decline in refinancing with rising interest rates.
“We’re looking at all our costs,” he said. “High-growth cash-burning businesses, in terms of investor-sentiment, are clearly not in favor.”