Investors advise startups as ‘new realities are sinking in, saying goodbye to great employees’
Bay Area angel investors and venture capitalists are working the phones, advising leaders of their portfolio companies and other entrepreneurs on how to navigate today’s choppy waters.
For some startup leaders, this is the first downturn they’ve experienced in their professional careers. And even for those with vivid memories of the 2008 financial crisis, this downturn has occurred far faster and steeper.
“Folks are very much shellshocked, but the level of the shock is geographically variable,” serial-entrepreneur-turned-venture-capitalist Ryan Gilbert of Propel Venture Partners told me. “I’ve spoken to founders in New York City. Some of them have been sick or their friends have been sick. They’re pretty much in a ground zero situation in a war zone.”
The severity of the public health crisis of this downturn has placed the bursting of the credit bubble in the shadows for some. But the cash squeeze is changing the rules of business for startups, real estate investors and chief financial officers.
“This environment can best be described as ‘risk off,’ and unlike earlier this year, ‘cash isn’t trash’ these days,” Ron Suber, who has invested in several fintech startups, told me. He said investors are often finding better deals, or waiting for better deals to emerge, in the secondary market rather than looking for new investment opportunities. “Many funds are getting redemptions and margin calls, which has led to a major shift of who buys what and where,” he added.
That takes a toll, financially and otherwise.
“It’s not just managing capital that I am focused on with entrepreneurs but also guiding psychology and self care in these rapidly changing times,” Suber said. “New realities are sinking in, saying goodbye to great employees who have supported the journey is brutal, addressing the ‘new normal’ all while focusing on the opportunities ahead.
“For some first-time entrepreneurs, this is their end of innocence and indifference,” Suber said. “This environment has forced some companies to reduce salaries, cut hours to 30 per week or move people from full time to by the hour.”
Much of the national attention has been on hourly workers losing their jobs in travel, restaurants and hospitality. But there’s a wave of layoffs building in fintechs and other companies large and small that employ workers in technology, legal, public relations, marketing and other fields tied to startups in technology and the housing market, which Zillow said this week is no longer “functioning.”
In other words, Suber and other investors have their hands full. Suber said he’s spent much of his time in recent days on the phone with entrepreneurs grappling with a range of questions that include how to cope with lack of demand, how long will the slowdown last, which unprofitable customers should be cut, and when will the credit markets thaw.
Suber also said that companies are weighing whether to proceed with committed investments and mergers and acquisitions. And for those that do proceed, price and terms may no longer make sense.
A primary concern for startups is how to extend their cash runway, given that many are not profitable nor are they generating cash.
“My advice to entrepreneurs is to move away from customer acquisition to customer retention. Nothing is more valuable than a customer you’ve already paid for and you already have a relationship with,” Gilbert told me. “Start finding ways to do more for these customers.
“We’re going to hear more about ‘retention marketing,’" said Gilbert, who encourages entrepreneurs to depend on these existing customers for word-of-mouth promotion and incentivize them with referral bonuses.
Gilbert said startups will see pre-money valuations cut in half. Others face the window for initial public offerings being closed for up to two years. That will send shock waves across the Bay Area’s startup ecosystem.
Brex co-CEO Henrique Dubugras this week shared tips with other startups coping with the new environment, urging them to be “paranoid” as they focus on survival.
Suber and Gilbert anticipate that they’ll continue spending many hours talking with entrepreneurs in the days ahead.
“Social distancing doesn’t mean financial and emotional distancing,” Suber said.
Hundreds of thousands of workers in King County and across Washington state are in industries that are at immediate risk due to impacts from the outbreak of the novel coronavirus, according to a new report.
A new report commissioned by the Seattle Metropolitan Chamber of Commerce estimates about 40% of all jobs in King, Snohomish and Pierce counties will be in the very near-term impacted “severely” by COVID-19 in the form of wage reductions or temporary layoffs. A lot of these jobs will start up again once the social distancing measures are lifted, the report said, but it warns: “Not all businesses will survive the challenge.”
“The Puget Sound economy is experiencing an economic shock that will take many months and beyond to recover from,” the report said.
The report identified industries at immediate risk and likely near risk from impacts related to the spread of the virus. It found, using data from the first three quarters of 2019, that 656,400 workers in King County are in industries that fall into those categories, with 288,100 in industries at immediate risk and 368,300 at likely near-term risk.
Wonderschool, a startup that’s most easily described as Airbnb for childcare, had to make that call last week when it laid off 75% of its staff, or about 50 people, Business Insider has learned.
The boutique hotel has fired a majority of its 100-person staff and plans to close 400 units in 10 locations
With reduced revenue and uncertainty caused by the COVID-19 outbreak, Seattle tech startups are temporarily letting go of workers to help keep their businesses afloat during an unprecedented economic period.
TripActions, the corporate travel startup backed by Andreessen Horowitz’s massive $2.2 billion growth fund, laid off 296 employees across business divisions on Tuesday, Business Insider has learned.
The company had over 1,000 employees prior to the cuts, according to startup database PitchBook, which would mean that the layoffs affected roughly a third of its workforce.
Once a rising star among Silicon Valley’s startup set, TripActions business has come to a grinding halt as businesses across the globe implemented travel bans and cities enforced shelter-in-place orders during the coronavirus pandemic.
Many have been warning since last fall that winter is coming for unprofitable, venture-backed startups. It is now becoming increasingly obvious that the season of investors refusing to fund these self-immolating ventures is here. The New York Times reported on 30 startups around the world that have eliminated over 8,000 jobs in the last four months.
Funding for startups may also be harder to find. The National Venture Capital Association reported that 2,215 U.S. startups raised money in the last quarter of 2019, which was the lowest since late 2016, according to the New York Times. I’ve seen for myself that venture capitalists will tell money-losing startups to get profitable before they’re willing to invest more.