Silicon Valley shuffle

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The demise of Fast shows that, The years-long startup boom is undergoing a sharp correction. Soaring inflation, supply chain disruptions and the war in Ukraine are sparking a wave of uncertainty sweeping the global economy. It hits young tech companies particularly hard because the present value of their profits, much of which lie in the distant future, is being eroded by rising interest rates. “It’s like a stun grenade hitting the market,” said one Silicon Valley veteran. The shock wave hit the venture capital (vc) industry, which was trying to identify and nurture the a google.

The startup downturn is just beginning. Investors are warning their portfolio companies to keep enough money in the bank until 2025. Many companies won’t be able to do that and go the Fast way. Others will stick with it. Some may even succeed because founders have learned to go easy on the bells and whistles and double down on their core business. When the dust settles, the global startup scene will be different, and possibly healthier.

in vc-dom. Non-traditional investors flock to speculative startups: venture capital arms of major corporations from Salesforce to Exxon Mobil, New York hedge funds Coatue and Tiger Global, Wall Street buyout tycoons and other “tourists” as they play in vc in the heart of Silicon Valley. From Beijing to Bangalore, new tech hubs have sprung up around the world.

No year has been fatter than 2021. According to cb research firm Insights has raised $621 billion in 2021. This is double the previous year and ten times the 2012 level. Then the music stopped. First feel that it is a public company. The tech-heavy Nasdaq composite index was up from November last year The peak fell by 30%. Data provider PitchBook estimates that there are more than 140 vc-backed companies in the US since then The 2020 market cap of going public is less than the total amount of venture capital raised in their lifetime. American electric car maker Faraday Future has raised more than $3 billion in funding and is now valued at just $710 million. Singapore-based super app Grab raised $14 billion at a $40 billion valuation before going public. Today, it has a market cap of $10 billion.

techno beatless is now spreading to the private market. Fundraising has slowed sharply compared to the second half of 2021. U.S. funding rounds fell 7% between March and May compared with the same period last year, according to PitchBook data. Asia was down 11% and Europe was down 19%. It’s almost certainly worse than the numbers suggest. Delays in reporting mean they are months behind local reality. vc Investors say hardly any deals are signed these days. Fewer startups also “exit”, vc are listed or sold to The jargon of other investors.

Investor silence is having an impact on private market valuations. Such declines typically only manifest themselves in private funding rounds or public listings, when companies raise capital in exchange for equity, or when companies change hands. Fewer fundraisers and fewer exits make this harder to assess.

ApeVue, a data provider that tracks what’s going on by tracking stock prices on the secondary market, can buy and sell shares in private companies. An equal-weighted index of the 50 most-traded startups has fallen 17% since its peak in January. Using data from ApeVue, The Economist estimates that 12 large startups that were worth $1 trillion at the start of the year are now worth about $750 billion. The list includes fintech star Stripe, whose secondary-market shares have fallen 45 percent since January, and TikTok’s Chinese parent company ByteDance, whose shares are down a quarter of what they were six months ago.

Secondary market valuations for private companies have not fallen as much as public companies. So far this year, ApeVue’s index is down about ten percent compared to the Nasdaq Composite . Comparing private companies with listed competitors shows the same pattern. Shares of private meatless meat supplier Impossible Foods have fallen 17% since January, while shares of publicly traded rival Beyond Meat have fallen 61%.

This may mean that the valuation of startups is more robust than that of public companies. Alternatively, they could fall further. The ultimate test will be the number of “drop rounds” in which companies raise new capital at lower valuations than before. The founders don’t like these, not the fall in the secondary market. A falling round is a clearer indicator of falling value. They also damage the morale of employees, who are often paid through stock options. They make vc companies forced to lower the value of their investments, which is not what they want need. LPs want to hear.

Only a few rounds of declines have been publicly reported. Last month as an example, The Wall Street Journal Swedish fintech company Klarna is seeking fresh funding at a valuation two-thirds below its last funding round a year ago, reports said. In March, grocery delivery company Instacart took a more unusual move, lowering its valuation to $24 billion from $39 billion in March last year, but did not raise new capital.

rain Stop time

Most investors expect no short-term There will be a series of declines. That’s partly because last year’s flood of capital kept many companies’ bank balances healthy. Consider the 70+ largest startups that sell business software. Established companies in the space are burning through cash at an average rate of around $500,000 a month, according to Brex, a provider of corporate banking services to startups. At this rate, all but three of the 70 companies have raised enough money in their final funding round to cover their expenses through 2025. Even at a burn rate of $4 a month, more than half of them have enough money to get through the cash left over from several funding rounds three years ago and any profits they may have made before counting them in.

To avoid rushing to raise capital amid depressed valuations, the founders are busy losing weight. “Last year the growth of a dollar was the same whether it cost 90 cents or $1.50 to get it,” says Hilary Gosher of vc

Insight Partners company. The watchword today is capital efficiency growth. According to Brex, the average cash burn rate for startups of all types has fallen over the past year, from the youngest to the more mature.

One way startups control costs is by laying off staff. About 800 startups have laid off staff since mid-March, according to the website Layoffs.fyi. Turkish delivery app Getir has laid off more than 4,000 people (14% of its workforce). Online mortgage lender Better.com cut 3,000 jobs (33%). Another common strategy is to reduce marketing spend. SensorTower is an analyst firm that measures how much companies spend on digital marketing. The median of the world’s 50 largest startups has reduced such spending in the U.S. by 43% since January. Some categories, such as instant delivery companies, including Getir and U.S. rival GoPuff, have made deeper cuts.

For some companies, the cuts just weren’t big enough. Those most vulnerable to a Fast-like fate are early-stage companies. On average, their burn rate means they have about 20 months of funding, less than the 30 months most VCs warn founders to prepare.

Among mature companies, three groups of risk are higher. Greylock Partners’ Asheem Chandna said one was companies in competing businesses, such as cybersecurity, just-in-time delivery and fintech, which suffered from “a glut of venture capital”, and the other vc company. “Anytime anything starts to work, vcs will go and fund it 10,” he added. The winner can do well. Medium-sized businesses may struggle to survive.

The second high-risk group is the unfortunate companies that did not raise capital in 2021, when investors were generous and valuations were sky-high. About 60 of the world’s 500 largest startups are in this camp. Most are smaller companies, such as Chinese education technology provider Yuanfudao and Israeli visually impaired equipment maker OrCam.

The third category is the companies most sensitive to consumer needs. In addition to delivering apps, this includes entertainment startups such as video game developer Epic Games and ByteDance. One of the indices tracked by ApeVue underperforms startups with high average deal volume. Crypto firms benefited from Americans betting their pandemic stimulus checks on Bitcoin and its more exotic cousins, and they too have struggled as the crypto space imploded. Shares in the secondary market for major crypto platform Blockchain.com have fallen 56 percent since March. Many Indian and Latin American startups also tend to be more consumer-focused. Mr Chandna found that international tech companies and investors had greater “anxiety” about the impending recession than in the United States.

The money hasn’t completely dried up yet. In Europe, the average deal size actually rose slightly (see Figure 5). Well-capitalized companies sense an opportunity. As the hot tech talent market cools, they will find it easier and cheaper to recruit. Smaller competitors may be cheaper. In the past few months, vc established tech companies such as ibm , Intel and Salesforce acquired startups. The same goes for industrial giants such as Shell and Schneider Electric.

Bloomberg reported on June 27, ftx, a Deep – Pocket cryptocurrency exchange, in talks to buy day trading app Robinhood. One investor recalled a recent deal that ended at about a third of the price discussed with the founders late last year. “The world has changed,” he noted. For many startups, the change will be painful and possibly fatal. This will be beneficial for the entire startup scenario. ■

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This article appeared in the business section of the print edition with the title “Silicon Valley Shuffle”

From July 2, 2022

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