Startups are in bad times

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Last week, employees of Cameo, a startup that sells celebrity personalized videosgathered for a general meeting. The news was not good: almost a quarter of the staff were laid off.

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“It was a tough day at the office today,” said Steve Galanis, CEO of the company. tweeted immediately after the announcement. “I have made the painful decision to let go of 87 of my favorite members of Cameo Fameo.” In response, people were outraged. Cameo began a massive recruitment campaign in 2021, with many layoffs affecting people who had been there for less than a year. It didn’t help that Galanis’ Twitter avatar was NFT Bored Ape.

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Just hours later, Doug Ludlow, CEO of fintech startup Mainstreet, announced that he laid off 30 percent of the company’s employees. “We have taken this action because we believe there is a very strong possibility that today’s incredibly difficult diamond market will only get worse,” Ludlow tweeted“and potentially remain so for months, if not years.”

The layoffs and the language around them are a stark departure from the optimism of the past two years, when VCs tossed around multi-million dollar deals like canapés at a cocktail party. The skyrocketing value and IPO boom has made startups a win-win, inspiring hundreds of new venture capital funds. Now it looks like the party is suddenly coming to an end, and the downsizing could signal that even worse times are ahead of us.

According to data collected Layoffs.fyi. Among them are companies like Robinhood and Peloton, which, after huge growth during the pandemic, now face the realities of a less dynamic economy and less cash. Startups like Cameo have had to reverse the spending spree of the past two years; Galanis said Information that the layoffs were a “painful but necessary” course correction to “balance our spending against our cash reserves”.

Cash reserves will play an increasingly important role in weathering the storm – startups that haven’t raised a funding round recently will likely find it harder to move forward. The first three months of 2022 were all-time high for late-stage venture capital deals, but that frantic pace has started to slow down. Now many investors have advised the founders spend conservatively with the expectation that raising the next round might not be as easy.

“Startups are in the toughest spot right now — they’re startups in the growth stage with unicorn valuations, high burnout rates, good but not the best numbers, and 12 months of cash,” says Matt Turk, partner at the venture capital fund. Firstmark company. “You will see a lot of layoffs there because companies need to cut costs urgently if they don’t want to run out of money.”

According to Kyle Stanford, Senior Venture Analyst at PitchBook, sentiment among venture capitalists has already changed markedly compared to 2021. Enthusiasm has faded in part because of broader economic factors—rising interest rates, inflation, and geopolitical uncertainty—that have already caused public markets to slump. It takes more time for these factors to affect private companies, but mass layoffs at growth stage startups are one sign that this has already happened. Startups that were planning to go public in 2022 have largely put it off, and public tech companies like Uber have decided to slash marketing and hiring costs. Larger companies such as Meta have already imposed a moratorium on hiring and warned staff of potential layoffs.

While most people agree that a downturn is coming, it could affect startups differently than previous spirals. That’s because, according to Pitchbook’s reckoning, nearly 2,000 new venture capital funds have been raised in the U.S. since the start of 2020 — “more than were closed in the seven-year period from 2006 to 2013,” says Stanford. VC deal making is unlikely to slow down completely because there are still billions of dollars left in circulation, even if valuations and deal sizes drop from record highs.

However, the feverish optimism of the past two years seems to be over. “Every day it seems like there is more fear in the market, and fear tends to be a self-fulfilling prophecy,” says Turk. Startups will have to compete more aggressively for venture capital or become profitable earlier to avoid relying on investors. “For those who can’t,” Turk says, “unfortunately, there’s probably going to be some kind of carnage — a combination of hires and outright failures. Expect some of them to be somewhat scandalous.”

On the positive side, startups that get through tough times tend to be stronger than ever. Many of today’s most popular companies—Uber, Airbnb, Square, Stripe, Facebook—started during recessions. But for every unicorn that rides during a downturn, hundreds more startups could be trampled.

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Credit: www.wired.com /

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