Silicon Valley is not yet sure what to do about the declines in the market. Startups are getting mixed signals, while concerns about stock market volatility and the prospect of a recession collide with record amounts of capital investors are willing to invest. Venture capitalists give the opposite advice, some encouraging startups to spend money quickly, and others predicting a hard decline that will require painful cuts.
This paradox highlights the tension between macroeconomic reality and the incentive structure in Silicon Valley, which encourages company founders and investors to spend a lot of money to achieve growth and returns. It also highlights the innovations in the current economic downturn: the bursting of the dot-com bubble and the financial crisis of 2008 do not offer many lessons for navigating today’s economic challenges, driven by a combination of the worst inflation in 40 years, Russia’s war in Ukraine, supply chain delays And the biggest interest rate increases after almost three decades.
“I personally don’t think much can be learned from recent crises, because this particular moment is so unique,” said Arun Mathew, an investor at venture capital firm Accel. “Everyone is in this uncertainty about what the next six months or the next 12 months will look like.”
This situation led to many contradictions. American startups have laid off more than 6,000 workers since the beginning of July, according to the site that tracks this field Layoffs.fyi. The employment plans have been abandoned and changes are being made in the designation of products, say company managers.
Other startups are taking their employees on vacations to resort towns, raising the largest amounts of capital ever or declaring, in the midst of macroeconomic upheaval, that it’s business as usual.
“You should invest the money in the company”
Eli Pertubi, a veteran investor in early-stage startups, remains optimistic. “I don’t think we are on the way to a significant decline,” he said. “Now is actually the time to speed up, and I wouldn’t listen to others who tell you to keep your money.”
Pertobi’s rationale: inflation is like a leaky bucket. The money startups save today is worth less tomorrow, so they are better off investing it in the company. In May, Pertobi said, the rate of investment at his company, Neo, was more than double the annual average of 2021.
As far as CEO Andriy Spondzik is concerned, nothing has changed in terms of running the startup, he said from Puerto Vallarta, Mexico, where he took a leave of absence from operations during a company vacation in this coastal city. The company he founded two years ago, Lumos, helps businesses manage IT expenses and comply with regulatory rules, And it continues in full force, he said. Lumos is expected to grow in terms of the number of employees this year by more than 50%.
David Finzer, CEO of OpenSea, a marketplace for NFT tokens, is bracing for more bad news. “We need to prepare the company for the possibility of a prolonged decline,” Finzer wrote in a memo to his employees in mid-July. The company, recently valued at $13 billion, announced that it was laying off a fifth from its employees.
Investment in American startups in the second quarter fell by more than 23% both from the previous quarter and compared to the same quarter last year, according to PitchBook Data. The average deal size this year, meanwhile, is the highest recorded in almost all phases of corporate capital raising. Investors are sitting on huge cash reserves, but they are much more selective about where to invest, so more money is concentrated in fewer startups, venture capitalists say. Venture capital investors raised $122 billion in new funding in the first half of the year – about 87% of all money raised in all of 2021, according to PitchBook data.
Many limited partnerships – the institutions and people who invest in venture capital funds – are seeking to slow down the pace of investments, so the investor and consultant for start-ups, Elad Gil, wrote in a post on his blog. Many startup founders say they are confident the money will be there when they need it, because returns to investors come from the profits and fees that come from investing other people’s money.
Sequoia recommends cutting back and saving cash
In May, Sequoia Capital sent all the startup founders in its portfolio a presentation titled “Adapting to Last,” advising the founders to conserve cash, make cuts and prepare for a lengthy recovery. In the first half of the year, Sequoia made 22 more investments in startups than in the same period last year, showing that the company is unfazed by market volatility, a person familiar with the matter said. 17 of those investments were in a startup accelerator program launched this year, Sequoia announced in May. In July, Sequoia closed nearly $2.25 billion in new financing, the person familiar with the matter said.
The startup industry is a microcosm of the macroeconomic signals involved. The American economy contracted in the first and second quarters, thus meeting the accepted definition of a recession, and the housing market is buckling under rising interest rates. But the unemployment rate remains low, 3.6% in June. Consumers continue to spend even with inflation at 9.1%, and that boosted retail sales in June.
Sometimes, a startup’s response to economic upheavals is determined by the beliefs of the founder or investors.
Austin Rosen, CEO of Electric Feel Entertainment, an entertainment company that has a venture capital arm, said of his portfolio: “We think it’s recession-proof.” His startups include a vegan skin care startup, a soda and a brand of anti-heartburn preparation. “The bet is that households will not restrain spending on these products,” Rosen said.
“This is not the best time to celebrate”
Many founders of larger startups said they set aside three or four years’ worth of cash, a huge amount that sometimes requires changes to business plans.
Thumbtack Inc, an app for hiring home improvement and repair professionals, earlier this year planned to increase its workforce by 60 percent from the 1,100 employees it has today, CEO Marco Zapacosta said. Now he says he will increase hiring by only 30 % to 40%.
Amy Yin, founder and CEO of OfficeTogether Inc., a startup that makes software that should help companies transition to hybrid working hours, said she is cutting corners: fewer treats like free meals and the stay of all company vacationers, something she supported a year ago as one of the foundations for strengthening human connections and morale .Her plans to take the workers to Nova Scotia in August have been canceled in the meantime. “It’s not the best time to celebrate,” Yin said.
Velocity Global, a startup that sells software that helps companies hire and work with international workers, raised $400 million in May. In this round, the leading investor, Norwest Venture Partners, gave the largest amount in its 61 years, according to one of the partners in the company, Parker Baril: $150 million.
“We are passionate about investing no less than ever before,” Baril said. “Will we be more careful? Obviously.”
At Velocity, they know what they want to do with the money. Among other things, the company intends to fly all employees to Denver at the end of the year for the company’s annual party, a spokeswoman said.