A wave of startup layoffs heralds a slow summer for venture capital investing

More layoffs in the first two weeks of May than in any full month since January 2021, while more than half of companies polled in an internal Andreessen Horowitz portfolio survey said they gave up hiring in 2022.

Fver the past couple of years, startup founders have grown accustomed to the love they’ve been getting from venture capitalists, who seem to be climbing over each other to seal deals.

Alas, it was so 2021. The feast of love is over.

“It dried up overnight,” said venture capitalist Dharmesh Thakker Forbes. It left many founders in shock, said Thakker, general partner of Battery Ventures in Boston.

It has also left many startup employees out of work. So far this month, more than 5,400 workers have been laid off, according to data from Layoffs.fyi, a website that tracks tech employment. That’s more people in two weeks than has been cut in a full month since January 2021. An internal survey of Andreessen Horowitz’s portfolio companies, shared with Forbes, showed more than half of them giving up hiring in 2022. Celebrity app Cameo, which announced it was cutting 87 employees, a quarter of its workforce, and consumer products retailer Thrasio were doing part of companies that blamed their downsizing on their decisions to hire too quickly in better times. The same was true for Robinhood, the asset trading app, which said in late April that it would lay off 340 employees, or 9% of its staff.

Record investments created a boom that seemed to last forever.

More than $329 billion was invested in US-based startups last year, nearly double the record amount of capital deployed in 2020, according to PitchBook. Startups learn the hard way that what goes up too quickly often goes down even faster. With the global economy rocked by Russia’s unprovoked war in Ukraine wreaking havoc on stock and energy prices, the worst inflation since the Reagan administration and a global pandemic that shows no signs of going away, investors suddenly put the brakes on, with money going to startups in the first quarter of 2022 at $70.7 billion, 26% less from the previous three months. It’s unclear if it’s a bump in the road or a washout, but market players have said Forbes expect at least a slow summer for venture capital investments.

“No one knows where the market is anymore,” says Tomasz Tunguz, managing director of Redpoint Ventures. “Six months ago, the recommendation was that every business try to grow as fast as possible. Today, I think with more companies than not, we are conservative in terms of hiring and burnout.

“No one knows where the market is anymore.”

Tomasz Tunguz, Managing Director of Redpoint Ventures

A chill has crept into the industry. This sentiment is evident among venture capital firm Andreessen Horowitz’s portfolio companies. A survey of CEOs of his companies distributed to a private social media group this month found that more than half were scrapping their hiring plans for the rest of 2022, according to a copy viewed by Forbes. Of the 90 respondents, 39 (43%) said they were slowing down hiring, five (6%) were freezing hiring and two (2%) were letting workers go. On the other hand, only 8% of CEOs said they plan to accelerate hiring; the remaining 41% said they would make no change.

Torben Friehe, a founder who attended startup accelerator Y Combinator last winter, said he halted plans to build a sales and marketing team for his seed-stage startup this year and instead limited staff growth to entry-level engineering hires. His 12-person startup, Wingback, which makes tools to help companies price and package their software, currently plans to grow to 16 people from the 25 it was aiming for a few months ago. “It’s a different way of approaching business because you’re consciously thinking about strategy now,” says Friehe. “What dollar should I spend and what dollar should I not spend? These things were just not a priority before because you always wanted to go as fast as possible.

Hiring freezes and layoffs are a common way for startups to extend the runway, or how long they can stay in business before they run out of money. Tunguz says even the companies with the strongest fundamentals prepare to have at least 12 months of trail. Startups that haven’t yet found a market for their product, he predicts, will likely need to downsize their team to a “small team” until they start generating revenue. Ullas Naik, founder of start-up practice Streamlined Ventures, says he recommends his portfolio companies achieve 18 months of runway, through a combination of hiring slowdowns and “creative funding,” often under the guise of form of venture capital debt. It encourages about 10-15% of the founders it backs to seek debt funding, up from 5% before the market downturn, he says. Mallun Yen, founder of venture capital firm Operator Collective, estimates that about three times as many portfolio companies are exploring at least debt options compared to before the downturn.

Most investors who spoke to Forbes say the decline in venture capital is here to stay for the foreseeable future, but some see an opportunity for start-ups to revive hiring in the next three to six months after an immediate lull. “In fact, I encourage all of our portfolio companies to find fantastic talent at bigger companies,” says Naik. Many growth-stage startups, he predicts, will soon be forced to accept funding rounds in which they raise money at a lower valuation than their previous funding round. Technology employees often receive stock option awards as part of their compensation, and those who still have jobs would see the value of options decline in downturns.

“There will probably be an opportunity in three to six months to poach some of these people,” Naik says. In the survey of companies backed by Andreessen Horowitz, 47% of 58 companies in the seed, Series A or Series B stage said they planned to at least slow down hiring, compared to 59% among the 32 respondents in Series C or later.

“Early-career founders are now like kids in candy stores with the quality of people they can hire,” says Thakker. “You’ve proven that people at some amazing companies don’t want to see their Netflix or Facebook stock go back to what it was three months ago because it could take three years to get there, or they see their stock options washed away because their company shouldn’t have raised $2 billion [valuation] when they had no income.

Thakker goes one step further and predicts that for companies that raised a lot of capital before the market dried up, there is an opportunity to increase headcount at a cheaper price through acquisitions. “That capital is now your competitive advantage,” he says. “It gives you the ability to buy competitors at a deep discount because they weren’t smart enough to raise money.”

At Streamlined Ventures, Naik says he’s halting investments in new ventures for at least the next two to three months. Historically, his company has made about one new investment per month. “Instead of working on new investments, we need to spend time on the existing portfolio to make sure they have a chance to come out of it in a stronger position,” he says. “This summer is going to be a slow summer for venture capitalists.”


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