Wave Of Layoffs At Startups Foretell A Slow Summer For Venture Investing
More firings in the first two weeks of May than in any full month since January 2021, while more than half the companies in an internal poll of Andreessen Horowitz’s portfolio say they’re pulling back on 2022 hiring.
For the past couple of years, startup founders got used to the love they received from venture investors, who seemed to be climbing over one another to secure deals.
Alas, that was so 2021. The lovefest is over.
“It just dried up overnight,” venture investor Dharmesh Thakker told Forbes. It’s left many founders in a state of shock, said Thakker, a general partner at Battery Ventures in Boston.
It’s also left many startup employees without jobs. So far this month, more than 5,400 workers have been let go, according to data from Layoffs.fyi, a website that tracks tech employment. That’s more people in two weeks than were cut in any full month since January 2021. An internal poll of Andreessen Horowitz’s portfolio companies, shared with Forbes, showed that more than half of them are pulling back on 2022 hiring. Celebrity shout-out app Cameo, which announced it was cutting 87 employees, or one-quarter of its workforce, and consumer-products seller Thrasio were among the companies that blamed their downsizing on decisions to hire too quickly during better times. So was Robinhood, the asset-trading app, which said at the end of April it would let go of 340 employees, or 9% of its staff.
Record investment created a boom that seemed as if it would go on forever.
More than $329 billion was poured into U.S.-based startups last year, nearly double the then-record amount of capital deployed in 2020, according to PitchBook. Startups are learning the hard way that what goes up too fast often comes down even faster. With the world’s economy buffeted by Russia’s unprovoked war in Ukraine playing havoc with stock and energy prices, the worst inflation since the Reagan administration and a worldwide pandemic that doesn’t look like it’s going away, investors have suddenly put the brakes on, with money going to startups in the first quarter of 2022 down to $70.7 billion, 26% less compared to the previous three months. It’s unclear whether this is a bump in the road or a washout, but market participants told Forbes to expect at least a slow summer for VC investment.
“No one knows where the market is anymore,” says Redpoint Ventures managing director Tomasz Tunguz. “Six months ago, the recommendation was for every company to try to grow as fast as you can. Today, I think with more companies than not, we’re being conservative in terms of hiring and burn.”
“No one knows where the market is anymore.”
A skittishness has wormed its way into the industry. That sentiment is evident among companies in venture firm Andreessen Horowitz’s portfolio. A survey of its companies’ CEOs distributed this month in a private social media group found that more than half were pulling back on 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 flip side, only 8% of CEOs said they are planning to accelerate hiring; the remaining 41% said they would make no changes.
Torben Friehe, a founder who participated in startup accelerator Y Combinator this past winter, says he halted plans to build out a sales and marketing team for his seed-stage startup this year, and is instead limiting headcount growth to core 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 instead of the 25 it targeted a couple months ago. “It’s a different way of approaching business because you’re consciously thinking about strategy now,” Friehe says. “Which dollar should I spend and which dollar should I not spend? These things were just not top of mind before because you always wanted to move as quickly as you can.”
Hiring freezes and layoffs are a common way for startups to extend runway, or the amount of time they can stay in business before running out of cash. Tunguz says that even companies with the strongest fundamentals are preparing to have at least 12 months of runway. Startups that haven’t yet found a market for their product, he predicts, will likely have to reduce their team size to a “skeleton crew” until they begin to generate revenue. Ullas Naik, founder of early stage practice Streamlined Ventures, says he’s recommending the companies in his portfolio get to 18 months of runway, through a combination of hiring slowdowns and “creative financing,” often in the form of venture debt. He’s encouraging about 10% to 15% of the founders he backs to seek debt financing, compared to 5% prior to the market downturn, he says. Mallun Yen, founder of venture firm Operator Collective, estimates that about three times as many portfolio companies are at least exploring debt options compared with before the downturn.
Most investors who spoke to Forbes say the slide in venture capital is here to stay for the foreseeable future, but some see an opportunity for early stage companies to ramp hiring back up in the next three to six months after a lull in the immediate term. “I’m actually encouraging all of our portfolio companies to find fantastic talent at bigger companies,” Naik says. Many growth-stage startups, he predicts, will soon be forced to accept down rounds, in which they raise funds at a valuation lower than their previous funding round. Tech employees are often given stock option grants as part of their pay packages, and those who still have jobs would see the value of the options shrink in down rounds.
“There’s probably going to be an opportunity in three to six months to poach away some of those people,” Naik says. In the survey of Andreessen Horowitz-backed companies, 47% of the 58 companies at the seed, Series A or Series B stage said they planned to at least slow down hiring, compared to 59% among the 32 respondents at Series C or later.
“Early stage founders are like kids in candy stores now with the quality of people they can hire,” Thakker says. “You have proven people from some incredible companies who either don’t want to see their Netflix or Facebook stock go back to what it was three months ago because it might take three years to get there, or they’re seeing their stock options washed away because their company shouldn’t have raised at $2 billion [valuation] when they had no revenue.”
Thakker takes it one step further and predicts that, for companies that raised lots of capital before the market dried up, there’s an opportunity to add 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 is halting investments into new companies for at least the next two to three months. Historically, his firm has made about one new investment per month. “Instead of working on new investments, we need to spend the time on the existing portfolio to make sure that they have a chance of coming out of this in a stronger position,” he says. “This summer is going to be a slow summer for venture investors.”
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