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Silicon Valley is conflicted about what to do about the market’s decline.
Startups are getting mixed signals amid concerns about stock market volatility and the prospect of a recession clashing with a record amount of capital ready for investors. Venture capitalists are giving conflicting advice, with some encouraging startups to spend quickly while others predict a severe downturn that will require painful cuts.
The paradox highlights the tension between macroeconomic realities and Silicon Valley’s incentive structure, which encourages founders and investors to spend big in pursuit of growth and returns. It also underscores the novelty of the current downturn: the dot-com bust and financial crisis of 2008 offer little guidance for managing today’s economic problems, fueled by a combination of the worst inflation in 40 years, Russia’s war in Ukraine and a snarling supply chain. and the biggest increase in interest rates in nearly three decades.
“Personally, I don’t think there’s much to learn from previous crashes because this particular moment is so unique,” said Arun Mathew, an investor at venture capital firm Accel. “Everyone is in this moment of uncertainty about what the next six months or the next 12 months will look like.”
It created a jumble of contradictions. US startups have laid off more than 6,000 employees since the start of July, according to tracker Layoffs.fyi. Hiring plans have been scrapped and pivot products are underway, company executives say.
Other startups are taking their employees on vacations to beach resorts, raising their largest rounds of funding ever, or declaring it’s business as usual amid macroeconomic turmoil.
Ali Partovi, a longtime early stage investor, remains optimistic. “I don’t think we’re headed for any kind of terrible downturn,” he said. “Now is actually the time to step up and I wouldn’t listen to others telling you to save money.”
Mr. Partov’s reasoning: Inflation is like a leaky bucket. The money startups save today is worth less tomorrow, so it’s better to invest in the business. In May, Mr Partovi said his firm Neo’s investment pace was more than double the monthly average in 2021.
Nothing has changed at all about the business of running a startup for CEO Andrej Safondsič, he said from Puerto Vallarta, Mexico, as he took a break from activities during a company retreat to the resort. His two-year-old company, Lumos, which helps businesses manage IT and compliance spending, is going full steam ahead, he says, and has increased staff by more than 50% this year.
Devin Finzer, CEO of OpenSea, a marketplace for non-fungible tokens, or NFTs, has more bad news coming. “We need to prepare the company for the possibility of a long-term downturn,” Mr. Finzer wrote in a memo to employees in mid-July. The company, last valued at $13 billion, said it had laid off 20% of its workforce.
Investment in U.S. startups in the second quarter fell more than 23% from both the previous quarter and the same three-month period a year ago, according to PitchBook Data Inc. At the same time, the average deal size for this year is the highest on record across nearly all startup stages. Investors are sitting on huge cash hoards but are being more selective about where they invest, so more money is concentrated with fewer startups, venture capitalists say. U.S. venture capitalists raised $122 billion in new funds in the first half of this year — 87% of the full-year record for 2021, according to PitchBook.
Many limited partners, institutions and individuals who invest in venture funds are asking venture capitalists to slow down the pace of investment, startup advisor and investor Elad Gil said in a blog post. Many startup founders say they are confident the money will be available when they need it because venture partners’ compensation comes from fees and profits from investing other people’s money.
In May, Sequoia Capital gave all startup founders in its portfolio a presentation called “Adapting to Endure,” which advised founders to save cash, cut back and prepare for a long recovery. In the first half of the year, Sequoia made 22 more startup investments than it did in the same period a year ago, signaling the company is not deterred by market volatility, according to a person familiar with the market’s volatility. Seventeen of those investments were part of a new startup-accelerator program launched this year, Sequoia also closed $2.25 billion in new funding in July, the person said.
The startup industry is a microcosm of mixed macroeconomic signals. The US economy slumped in the first and second quarters, meeting the commonly used definition of a recession, and the housing market is reeling under rising interest rates. However, the unemployment rate remained low, at 3.6% in June. And consumers continued to spend despite 9.1% inflation, which boosted retail sales in June.
Sometimes a startup’s response to economic turbulence is determined by the beliefs of its founder or investor.
Austin Rosen, chief executive of Electric Feel Entertainment, an entertainment company with a venture capital arm, said of his portfolio: “We think it’s a recession.” His startups include a vegan skin care startup, a soda start-up and a Hard seltzer brand .” “The bet is that households will not cut back on spending on these products,” Mr. Rosen said.
Many founders of larger startups have reported spending three to four years of cash, a huge amount that often requires adjusting hiring plans. Thumbtack Inc., a hiring app for home improvement and repair professionals, had plans at the start of the year to increase its workforce by 60% from its current workforce of more than 1,100, CEO Marco Zappacosta said. He said he got it down to about 30 to 40%.
Amy Yin, founder and chief executive of OfficeTogether Inc., a startup that makes software to help companies with hybrid work settings, said she’s trying to trim the edges: Fewer perks like free meals and company-wide retreats, something that she advocated. a year ago as the key to connection and morale. Plans to take her staff to Nova Scotia in August have been tabled.
“Not the best time to have a super celebration,” said Ms. Yin.
Velocity Global LLC, a startup that sells software that helps companies recruit and hire international workers, raised $400 million in May. The round included the largest lead investor check Norwest Venture Partners has written in its 61-year history, said firm partner Parker Barrile: $150 million.
“We are as eager to invest as we have ever been,” Mr Barrile said. “Will we be more careful? Sure.”
Velocity has plans for the money. Among other things, the company intends to fly its entire staff to Denver later this year for an annual company party, the spokeswoman said.