Start-up 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, start-ups start cutting costs and laying off employees.
People started dumping their start-up stock, too.
The number of people and groups trying to unload their start-up shares doubled in the first three months from 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 start-ups, known as “unicorns,” have plunged by 22 percent to 44 percent 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 start-up global easy-money ebullience of the last decade has faded. Each day, warnings of a coming downturn about another round of headlines between ricochet social media across start-up job cuts. And what was once seen as a surefire way to immense riches – owning start-up stock – is now seen as a liability.
The turn has been swift. In the first three months of the year, venture funding in the United States fell 8 percent from a year ago, 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 IPOs, the main way start-ups cash out, plummeted 80 percent from a year ago as of May 4, according to Renaissance Capital, which follows IPOs
Last week, Cameo, a celebrity shout-out app; On Deck, a career-services company; and MainStreet, a financial technology start-up, all shed at least 20 percent of their employees. Fast, a payments start-up, and Halcyon Health, an online health care provider, abruptly shut down in the last month. And the grocery delivery company Instacart, one of the most valuable start-ups 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. “Any price at Growth is just not enough anymore.”
The start-up 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 money-losing companies afloat: Venture capital funds raise a record $ 131 billion last year, according to PitchBook.
But what is different now is the collision of troubling economic forces combined with the sense that the start-up of the frenzied behavior of the world over the last few years has been due to a reckoning. A decade-long run of low interest rates that enable investors to take on bigger risks is high-growth start-ups. 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 prepandemic 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.
On social media, investors and founders have issued a steady drumbeat of dramatic warnings, compelling negative sentiment to that of the early 2000s dot-com crash And stressing that a pullback is “real.”
Even Bill Gurley, a Silicon Valley venture capital investor who got so tired of warning start-ups about bubbly behavior over the last decade that he gave up, has returned to form. “The ‘unlearning’ process could be painful, surprising and unsettling to many,” he said cloudy in April.
The uncertainty has caused some venture capital firms to make pause deals. D1 Capital Partners, which participated in roughly 70 start-up 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 were struck before the moratorium, said two people with knowledge of the situation, who were being 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 start-ups it invested in out of 88, the most it had ever done in a quarter. The shift was stark compared to just a few months ago, when investors were begging founders to take more money and spend it grow even faster.
That fact had not yet sunk in with some entrepreneurs, Mr. Mohnot said. “People don’t realize the scale of change that happened,” he said.
Entrepreneurs are experiencing whiplash. Knock, a home-buying start-up in Austin, Texas, expanded its operations from 14 cities to 75 in 2021. The company plans to go public through a special purpose acquisition company, or SPAC, valuing it at $ 2 billion. But as the stock market became rocky over the summer, Knock canceled those plans and offered to sell itself to a larger company, which it declined to disclose.
In December, the acquirer’s stock price dropped 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 to a deal that valued it at just over $ 1 billion.
Throughout the roller-coaster year, Knock’s business continues to grow, said Sean Black, founder and chief executive. But many of the investors didn’t care.
“It’s frustrating as a company you know crushing it, but they’re just reacting to whatever the ticker says today,” he said. “You have this amazing story, this amazing growth, and you can’t fight this market momentum.”
Mr. Black said his experience was not unique. “Everyone is quietly, embarrassingly, shamefully going through this and not willing to talk about it,” he said.
Matt Birnbaum, head of talent at the venture capital firm Pearl VC, said companies should carefully manage expectations around the value of their start-up stock. He predicted a rude awakening for some.
“If you’re 35 or under in tech, you probably never saw a down market,” he said. “What you’re accustomed to is up and to the right your entire career.”
Start-ups that went public amid the highs of the last two years are getting pummeled in the stock market, even more so than the entire tech sector. Shares in Coinbase, the cryptocurrency exchange, has fallen 81 percent since its debut in April last year. Robinhood, a stock trading app that had explosive growth during the pandemic, is trading 75 percent below its IPO price. Last month, the company laid off 9 percent of its staff, blaming overzealous “hypergrowth.”
SPACs, which were a trendy way for very young companies to go public in recent years, have performed so poorly that some are now going private again. SOC Telemed, an online health care start-up, 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 percent discount.
Others are in danger of running out of cash. Canoo, an electric vehicle company that went public in late 2020, said on Tuesday that 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 private market. Since it went public last year, its value has sunk to $ 1 billion. Last month, it said it would cut 200 workers, or roughly 10 percent of its staff.
Tim Mayopoulos, Blend’s president, blamed the cyclical nature of the mortgage business and the steep drop in refinancings that accompany rising interest rates.
“We’re looking at all our expenses,” he said. “High-growth cash-burning businesses are, from an investor-sentiment perspective, clearly not in favor.”