Fear and loathing return to tech startups

SAN FRANCISCO >> Startup workers came into 2022 expecting another year of cash-gushing initial public offerings. Then the stock market tanked, Russia invaded Ukraine, inflation ballooned, and interest rates rose. Instead of going public, startups began cutting costs and laying off employees.

People started dumping their startup stock, too.

The number of people and groups trying to unload their startup 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 stock. The share prices of some billion-dollar startups, known as “unicorns,” have plunged by 22% to 44% in recent months, he said.

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

That's a sign of how the startup world's easy-money ebullience of the last decade has faded. Each day, warnings of a coming downturn ricochet across social media between headlines about another round of startup job cuts. And what was once seen as a sure path to immense riches — owning startup stock — is now viewed as a liability.

The turn has been swift. In the first three months of the year, venture 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 shut down since the beginning of the year, compared with 25 this time last year, according to Layoffs. fyi, which monitors layoffs. And initial public offerings, the main way startups cash out, plummeted 80% from a year ago as of May 4, according to Renaissance Capital, which follows IPOs.

Last week, Cameo, a celebrity shoutout app; On Deck, a career-services company; and MainStreet, a financial technology startup, all shed at least 20% of their employees. Fast, a payments startup, and Halcyon Health, an online health care provider, abruptly shut down in the last month. And grocery delivery company Instacart, one of the most highly valued startups of its generation, slashed its valuation to $24 billion in March from $40 billion last year.

“Everything that has been true in the last two years is suddenly not true,” said Mathias Schilling, a venture capitalist at Headline. “Growth at any price is just not enough anymore.”

The startup market has weathered similar moments of fear and panic over the past decade. Each time, the market came roaring back and set records. And there is plenty of money to keep moneylosing 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 the sense that the startup world's frenzied behavior of the last few years is due for a reckoning. A decadelong run of low interest rates that enabled investors to take bigger risks on high-growth startups is over. The war in Ukraine is causing unpredictable macroeconomic ripples. Inflation seems unlikely to abate anytime soon. Even the big tech companies are faltering, with shares of Amazon and Netflix falling below their pre-pandemic levels.

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

The uncertainty has caused some venture capital firms to pause dealmaking. D1 Capital Partners, which participated in roughly 70 startup deals last year, told founders this year that it had stopped making new investments for six months. The firm said that any deals being announced had been 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 firms have lowered the value of their holdings to match the falling stock market. Sheel Mohnot, an investor at Better Tomorrow Ventures, said his firm had recently reduced the valuations of seven startups it invested in out of 88, the most it had ever done in a quarter. The shift was stark compared with just a few months ago, when investors were begging founders to take more money and spend it to grow even faster.

That fact had not yet sunk in with some entrepreneurs, Mohnot said.