ChartHop CEO Ian White
ChartHop CEO Ian White breathed a huge sigh of relief in late January after launching his cloud software Brought up a funding round of 20 million dollars. He had begun the process six months earlier during a brutal period for tech stocks and a step in venture funding.
For ChartHop’s previous round in 2021, it took White less than a month to raise $35 million. The market hastily turned against him.
“It was just a total reversal of the speed at which investors were willing to move,” said White, whose company sells cloud technology used by human resources departments.
Whatever comfort White felt in January quickly evaporated last week. On March 16 – a Thursday – ChartHop held its annual revenue launch at the DoubleTree by Hilton Hotel in Tempe, Arizona. As White spoke in front of more than 80 employees, his phone blew up with messages.
White stepped off the stage to find hundreds of panicked messages from fellow founders about Silicon Valley Bank, whose the stock was down more than 60% after the company said it was trying to raise billions of dollars in cash to offset deteriorating deposits and untimely investments in mortgage-backed securities.
Startup managers were climb to figure out what to do with their money, which was locked up at the 40-year-old company long known as a PIN of the technology industry.
“My first thought, I was like, ‘this isn’t like FTX or something,'” White said of the cryptocurrency exchange that imploded at the end of last year. “SVB is a very well managed bank.”
But a bank run was underway, and on Friday SVB had been seized by regulators in the second largest bank failure in US history. ChartHop banks with JPMorgan Chase, so the company had no direct exposure to the collapse. But White said many of his startup’s customers kept their deposits with SVB and were now unsure whether they would be able to pay their bills.
While the deposits were in the end backstopped last weekend and SVB’s government appointed CEO tried rreassure customers that the bank was open for business, the future of Silicon Valley Bank is highly uncertain, further hampering an already troubled startup funding environment.
SVB was a leader in so-called risky debt and gave loans to risky early-stage companies in software, drug development and other areas such as robotics and climate technology. Now it is widely expected that such capital will be less available and more expensive.
White said SVB has shaken the confidence of an industry already struggling with rising interest rates and stubbornly high inflation.
Exit activity for venture-backed startups in the fourth quarter fell more than 90% from a year earlier to $5.2 billion, the lowest quarterly total in more than a decade, according to data from PitchBook – NVCA Venture Monitor. The number of deals decreased for the fourth quarter in a row.
In February, funding fell 63% from $48.8 billion a year earlier, according to a Crunchbase funding report. Late-stage funding was down 73% year-over-year, and early-stage funding was down 52% over that stretch.
“The world was falling apart”
CNBC spoke with more than a dozen founders and venture capitalists, before and after the SVB meltdown, about how they are navigating the uncertain environment.
David Friend, a tech industry veteran and cloud data storage startup CEO Wasabi Technologieshit the fundraising market last spring in an attempt to find fresh cash for which public market multiples cloud software was falling apart.
Wasabi had raised its previous round a year earlier, when the market was humming, IPOs and special purpose acquisition companies (SPACs) were booming and investors were high on low interest rates, economic stimulus and strong earnings growth.
By May of last year, Friend said, several of his investors had backed out, forcing him to restart the process. Raising money was “very distracting” and took up more than two-thirds of his time over nearly seven months and 100 investor presentations.
“The world fell apart when we put the deal together,” said Friend, who co-founded the Boston-based startup in 2015 and previously launched numerous other ventures, including data backup provider Carbonite. “Everybody was scared at the time. Investors were just pulling in their horns, the SPAC market had fallen apart, tech company valuations were collapsing.”
Friend said the market always bounces back, but he believes many startups don’t have the experience or capital to weather the current storm.
“If I didn’t have a good management team in place to run the company day-to-day, things would have fallen apart,” said Friend, in an interview before SVB’s collapse. “I think we squeaked through, but if I had to go back to the market right now and raise more money, I think it would be extremely difficult.”
In January, Tom Loverro, an investor with Institutional Venture Partners, shared a thread on Twitter predicting a “mass extinction event” for early and mid-stage companies. He said it will make the 2008 financial crisis “look quaint”.
Loverro harkened back to the period when the market reversed, beginning in late 2021. The Nasdaq reached its all-time high in November of that year. As inflation began to jump and the Federal Reserve signaled that interest rate hikes were on the way, many venture capital firms told their portfolio companies to raise as much money as they would need to last 18 to 24 months, because a massive downturn was on the way.
In a tweet that was widely shared across the tech world, Loverro wrote that a “flood” of startups will seek capital in 2023 and 2024, but some won’t get funding.
Federal Reserve Chairman Jerome Powell arrives for testimony before the Senate Banking Committee on March 7, 2023 in Washington, DC.
Win Mcnamee | Getty Images News | Getty Images
Next month will mark 18 months since the Nasdaq peak, and there are few signs investors are ready to jump back into risk. There has not been a notable risk-backed technical IPO since late 2021, and none seem to be on the horizon. At the same time, late stage risk-backed companies that Stripe, Klarna and Instacart have dramatically reduced their values.
In the absence of venture funding, money-losing start-ups have had to lower their burn rates to extend their cash runway. Since the beginning of 2022, roughly 1,500 tech companies have laid off a total of nearly 300,000 people, according to the website Redundancies.fyi.
Kruze Consulting provides accounting and other back-end services to hundreds of tech startups. According to the company’s consolidated customer data, which it shared with CNBC, the average startup had a 28-month runway in January 2022. That dropped to 23 months in January of this year, which is still a historic high. At the beginning of 2019, it was under 20 months.
Madison Hawkinson, an investor at Costanoa Ventures, said more companies than normal will fail this year.
“It’s definitely going to be a very heavy, very volatile year in terms of just the profitability of some early-stage startups,” she told CNBC.
Hawkinson specializes in computer science and machine learning. It is one of the few hotspots in startup countries, largely due to the hype around OpenAI’s chatbot called ChatGPT, which went viral late last year. Yet being in the right place at the right time is no longer enough for an aspiring entrepreneur.
Founders should anticipate “significant and heavy due diligence” from venture capitalists this year instead of “quick decisions and quick moves,” Hawkinson said.
The enthusiasm and hard work remains, she said. Hawkinson hosted a demo event with 40 AI startup founders in New York earlier this month. She said she was “shocked” by their stylish presentations and positive energy amid the industry-wide gloom.
“The majority of them stayed until 11 p.m.,” she said. “The event was supposed to end at 8 o’clock.”
Founder “can’t sleep at night”
But in many areas of the startup economy, business leaders are feeling the pressure.
Matt Blumberg, CEO of Support, said the founders are optimistic by nature. He created Bolster at the height of the pandemic in 2020 to help startups hire executives, board members and advisors, and now works with thousands of companies while making venture investments.
Even before the SVB failure, he had seen how difficult the market had become for startups after consecutive record years of funding and a longer stretch of VC-subsidized growth.
“I coach and mentor a lot of founders, and that’s the group that’s like, they can’t sleep at night,” Blumberg said in an interview. “They put on weight, they don’t go to the gym because they’re stressed or working all the time.”
VCs tell their portfolio companies to get used to it.
Bill Gurley, the long-standing Benchmark partner who backed off Uber, Zillow and Syfixtold Bloomberg’s Emily Chang last week that the frothy market before 2022 will not return.
“In this environment, my advice is pretty simple, which is — what we lived through the last three or four years, it was fantasy,” Gurley said. “Assume this is normal.”
Laurel Taylor recently got a crash course in the new normal. Her startup, Candidly, notified a $20.5 million funding round earlier this month, just days before SVB made front-page news. Candidly’s technology helps consumers manage education-related expenses like student debt.
Taylor said the fundraising process took her about six months and included many conversations with investors about unit economics, business fundamentals, discipline and a path to profitability.
As a female founder, Taylor said she has always had to deal with more scrutiny than her male counterparts, who for years enjoyed the Silicon Valley mantra of growth at all costs. More in her network are now seeing what she has experienced in the nearly seven years since she started Candidly.
“A friend of mine, who is male, by the way, laughed and said, ‘Oh, no, everyone gets treated like a female founder,'” she said.
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