ChartHop CEO Ian White
ChartHop
ChartHop CEO Ian White breathed a sigh of relief in late January after his cloud software startup secured a $20 million round of funding. He had started the process six months earlier during a brutal period for tech stocks and a slump in venture capital funding.
ChartHop’s previous round in 2021 took White less than a month to raise $35 million. The market quickly turned against him.
“There was just a complete reversal in the speed at which investors were willing to move,” said White, whose company sells cloud technology used by human resources departments.
What comfort White felt in January quickly evaporated last week. On March 9th – a Thursday – ChartHop held its annual sales kickoff at the DoubleTree by Hilton Hotel in Tempe, Arizona. As White spoke to more than 80 employees, his phone exploded with messages.
White stepped off the stage to find hundreds of panicked messages from fellow founders about the Silicon Valley bank, whose stock had fallen more than 60% after the firm said it was trying to raise billions of dollars in cash to start the business to compensate for deteriorating deposits and to invest in mortgage-backed securities at a bad time.
Startup executives were trying to figure out what to do with their money locked up in the 40-year-old firm long known as the linchpin of the tech industry.
“My first thought was, ‘This isn’t like FTX or anything,'” White said of the cryptocurrency exchange that imploded late last year. “SVB is a very well run bank.”
But a bank run was underway, and on Friday, SVB was arrested by regulators in the second largest bank failure in US history. ChartHop banks with JPMorgan Chase, so that the company was not directly exposed to the collapse. But White said many of his startup’s customers were holding their deposits with the SVB and were now unsure if they could pay their bills.
While deposits were finally recalled last weekend and SVB’s government-appointed CEO sought to reassure customers that the bank was open for business, Silicon Valley Bank’s future is very uncertain, given the already difficult funding environment Startups further hampered.
SVB was a leader in so-called venture debt, lending to risky early-stage companies in software, drug development and other areas such as robotics and climate technology. It is now widely expected that such capital will become less available and more expensive.
White said SVB has shaken confidence in an industry already grappling with rising interest rates and stubbornly high inflation.
According to data from PitchBook-NVCA Venture Monitor, exit activity for venture capital-backed startups fell more than 90% year over year to $5.2 billion in the fourth quarter, the lowest quarterly total in more than a decade. The number of deals fell for the fourth quarter in a row.
Funding in February was down 63% from $48.8 billion a year earlier, according to a funding report from Crunchbase. Late-stage funding was down 73% year over year, and early-stage funding was down 52% over the period.
“The world collapsed”
CNBC spoke to more than a dozen founders and venture capitalists before and after the SVB collapse about how they are navigating the precarious environment.
David Friend, a tech industry veteran and CEO of cloud data storage startup Wasabi Technologies, hit the fundraising market looking for fresh cash last spring when multiples for cloud software in the public market plummeted.
Wasabi had raised its previous round a year earlier when the market was booming, IPOs and special purpose acquisition companies (SPACs) were booming, and investors were drunk on low interest rates, economic stimulus and skyrocketing revenue growth.
By last May, Friend said several of his investors had pulled out, forcing him to restart the process. Raising money was “very distracting,” taking more than two-thirds of his time over nearly seven months and 100 investor presentations.
“The world collapsed as we put the deal together,” said Friend, who co-founded the Boston-based startup in 2015 and has previously launched numerous other ventures, including backup provider Carbonite. “Everyone was scared back then. Investors were just sucking in their horns, the SPAC market had broken up, valuations for tech companies plummeted.”
Friend said the market keeps recovering, 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 to run the company on a day-to-day basis, everything would have collapsed,” Friend said in an interview before SVB’s collapse. “I think we fought our way through, but if I had to go back into the market now and raise more money, I think that would be extremely difficult.”
In January, Tom Loverro, an investor at Institutional Venture Partners, shared a thread on Twitter predicting a “mass die-off” for early- and mid-stage companies. He said it will make the 2008 financial crisis “look whimsical.”
Loverro recalled the time when the market turned from late 2021. The Nasdaq reached its all-time high in November of this year. As inflation started to rise and the Federal Reserve announced rate hikes, many VCs urged their portfolio companies to raise as much money as needed for 18 to 24 months as a massive pullback was imminent.
In a tweet widely shared in the tech world, Loverro wrote that a “flood” of startups will attempt to raise capital in 2023 and 2024, but that some will not be funded.
Federal Reserve Chairman Jerome Powell arrives to testify before the Senate Banking Committee March 7, 2023 in Washington, DC.
Win Mcnamee | News from Getty Images | Getty Images
Next month will be 18 months since the Nasdaq peak, and there are few signs that investors are ready to start risking again. There hasn’t been a notable venture-backed tech IPO since late 2021, and none appear to be on the horizon. Meanwhile, late-stage venture-backed companies like Stripe, Klarna, and Instacart have slashed their valuations.
In the absence of venture capital, money-losing startups have had to lower their burn rates to extend their cash reserves. According to the website Layoffs.fyi, around 1,500 tech companies have laid off a total of almost 300,000 employees since the beginning of 2022.
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 fell to 23 months in January this year, which is still an all-time high. At the beginning of 2019, it was less than 20 months.
Madison Hawkinson, an investor at Costanoa Ventures, said more companies than normal will go under this year.
“It’s definitely going to be a very tough, very variable year in terms of profitability for some early-stage startups,” she told CNBC.
Hawkinson specializes in data science and machine learning. It’s one of the few hot spots in startup land, largely due to the hype surrounding OpenAI’s chatbot called ChatGPT, which went viral late last year. But being in the right place at the right time is no longer enough for an aspiring entrepreneur.
Founders should expect “considerable and great diligence” from venture capitalists this year, rather than “quick decisions and quick moves,” Hawkinson said.
The enthusiasm and hard work remain, she said. Hawkinson hosted a demo event with 40 founders for artificial intelligence companies earlier this month in New York. She said she was “shocked” by her polished presentations and positive energy amid the industry-wide darkness.
“Most of them stayed until 11 p.m.,” she said. “The event should end at 8.”
Founders can’t sleep at night
But in many areas of the startup economy, business leaders are feeling the pressure.
Bolster CEO Matt Blumberg said founders are optimistic by nature. He founded Bolster at the height of the pandemic in 2020 to help startups recruit executives, board members and consultants and today works with thousands of companies and also makes venture investments.
Even before SVB’s failure, he had seen how difficult the market had become for start-ups after consecutive record-breaking years of funding and a long period of VC-subsidized growth.
“I coach and mentor a lot of founders, and this is the group that can’t fall asleep at night,” Blumberg said in an interview. “They gain weight, they don’t go to the gym because they’re stressed or they work all the time.”
VCs advise their portfolio companies to get used to it.
Bill Gurley, the longtime benchmark partner who provided support Over, Zilov And stitch fixBloomberg’s Emily Chang said last week that the seething market won’t come back until 2022.
“In that environment, my advice is pretty simple, which is – what we’ve been going through for the last three or four years, that’s been fantasy,” Gurley said. “Suppose that’s normal.”
Laurel Taylor recently took a crash course in the new normal. Her startup Candidly announced a $20.5 million funding round earlier this month, just days before SVB hit the front pages. Candidly’s technology helps consumers deal with education-related expenses like student debt.
Taylor said the fundraising process took about six months and involved many discussions with investors about unit economics, business fundamentals, discipline and a path to profitability.
As a founder, Taylor said she’s always faced more trials than her male counterparts, who for years have enjoyed Silicon Valley’s “growth at any cost” mantra. More people in her network are now seeing what she’s been through in the six years since she founded Candidly.
“A friend of mine, who’s male by the way, laughed and said, ‘Oh no, everyone is treated like a founder,'” she said.
CORRECTION: This article has been updated to reflect that ChartHop will be closed on Thursday, March 9th.
REGARD: Liquidity constraints could lead to more mergers and acquisitions and faster tech IPOs
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2023-03-19 15:49:55
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