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Sunday, April 14, 2024

The Bad Times Are Coming for Startups

Last week, the employees of Cameo, a startup that sells personalized videos from celebrities, gathered for an all-hands meeting. The news was not good: Nearly a quarter of the staff was being laid off.

“Today has been a brutal day at the office,” Steve Galanis, the company’s CEO, wrote on Twitter just after the announcement. “I made the painful decision to let go of 87 beloved members of the Cameo Fameo.” In the replies, people were pissed. Cameo had gone on a massive hiring spree in 2021, and many of the layoffs affected people who had worked there less than a year. It didn’t help that Galanis’ Twitter avatar was a Bored Ape NFT.

Just a few hours later, Doug Ludlow, the CEO of the fintech startup Mainstreet, announced that he had cut 30 percent of the company’s employees. “We took this action because we believe that there is a very strong chance that today’s incredibly rough market is only going to get worse,” Ludlow tweeted, “and potentially remain so for months, if not years.”

The layoffs, and the language around them, are a sharp departure from the optimism of the past two years, when venture capitalists passed around multimillion-dollar deals like canapés at a cocktail party. Soaring valuations and booming IPOs made startups seem like a safe bet, inspiring hundreds of new venture funds. Now, the party seems to be suddenly ending—and downsizing may signal even worse times ahead.

Since January, nearly 50 startups have made significant layoffs, according to data collected by Layoffs.fyi. Among them are companies like Robinhood and Peloton, which after huge growth during the pandemic now face the realities of a less buoyant economy, and less cash on hand. Startups like Cameo have had to reverse the spending sprees of the last two years; Galanis told The Information that layoffs were a “painful but necessary” course correction to “balance our costs with our cash reserves.”

Cash reserves will be increasingly important to weather the storm—startups that didn’t raise a round recently will likely have more difficulty going forward. The first three months of 2022 marked a record high for VC dealmaking among late-stage startups, but that frenzied pace has begun to slow. Now, many investors have advised founders to spend conservatively with the expectation that raising the next round might not be as breezy.

“Right now, the startups that are in the trickiest situation are growth-stage startups with unicorn-type valuations, a high burn rate, good but not great metrics, and 12 months of cash,” says Matt Turck, a partner at venture capital firm Firstmark. “You're going to see a lot of layoffs there, because companies need to urgently cut their burn if they don't want to run out of cash.”

The mood among venture capitalists has already changed notably from 2021, says Kyle Stanford, a senior VC analyst at PitchBook. The enthusiasm has waned, in part, because of broader economic factors—rising interest rates, inflation, and geopolitical uncertainty—that have already created a downturn in public markets. It takes longer for those factors to affect private companies, but the mass layoffs in growth-stage startups are one indication that it already has. Startups that had planned to IPO in 2022 have largely held off on doing so, and public tech companies like Uber have decided to cut down on marketing spend and hiring. Larger companies, like Meta, have already implemented hiring freezes and warned staff that cutbacks may be coming.

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While most people agree that a downturn is coming, it might affect startups differently than previous spirals. That’s because, by Pitchbook’s count, nearly 2,000 new venture funds have been raised in the US since the beginning of 2020—“more than was closed in the seven-year period from 2006 to 2013,” Stanford says. VC dealmaking is unlikely to slow down completely, because there are still billions of dollars left to be circulated, even if valuations and deal sizes come down from their record highs.

Still, it seems like the feverish optimism of the last two years is over. “Every day there seems to be more fear in the market, and fear tends to be a self-fulfilling prophecy,” says Turck. Startups will have to compete more aggressively for venture capital, or will have to become profitable sooner so that they don't have to rely on investors. “For those that can't,” says Turck, “there will probably be some carnage, unfortunately—a combination of acqui-hires and outright failures. Expect a few of those to be somewhat scandalous.”

One silver lining: Startups that make it through tough times tend to come out stronger than ever. Many of today’s hottest companies—Uber, Airbnb, Square, Stripe, Facebook—started during downturns. But for every unicorn that gallops through the downturn, hundreds more startups may get trampled.

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