Venture Backed Startups Are Struggling

Sebastien Callebaut -

Growth Is Being Punished

Startup workers have been impacted by workforce cutbacks in every significant industry, including SaaS, education technology, and mobility. In addition, a considerably wider range of businesses have started informing staff members of the significant layoffs they are making. At first, it seemed that this was a trend that exclusively affected growth-stage enterprises that were growing a bit too fast.

  • Yet, the number of layoffs has increased to a level not seen in more than two years
  • 20,514 employees have lost their jobs at technology firms worldwide since April, according to the tracker Layoffs.fyi
  • This highlights worsening conditions in the VC market where general partners have to take a more disciplined approach

Forced Growth, Inefficient Startups

SoftBank Group and Tiger Global Management's subpar portfolio outcomes shows the excesses created by venture capital money as startups were forced to grow at any cost. These startups are now in a dangerous spot as they have to learn to be profitable, quickly.

  • Softbank's portfolio companies were, until now, often fetching extremely high valuations despite having no real path to profitability
  • Masayoshi Son, the chairman and CEO of SoftBank, has now said that the Japanese organization will take a defensive position characterized by "stricter investment criteria."

Yet, according to PitchBook, U.S. venture capital firms had $70 billion in total available for new investments at the end of March, surpassing the amount witnessed between 2008 and 2010 — the years prior to and following the global financial crisis. This demonstrates that a promising startup still has a good probability of receiving funding.

BENCHMARK'S TAKE

  • Funding is drying up for fast growing startups. The most recent setback is exemplified by Klarna, who had to raise around $ 650m at a $ 6.5B valuation
  • This is a large drop from the $ 45B valuation it got by raising capital from Softbank back in 2021
  • The short term impact can be devastating for badly managed startups. Still, we expect the market to stabilise and dry powder to flow back to startups (at a discount) once inflation gets under control

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Mars Sector-6 on Unsplash.