In late January, ChartHop CEO Ian White breathed a sigh of relief after his cloud software business won a $20 million fundraising round. He'd begun the process six months before, amid a difficult moment for tech stocks and a drop in venture investment.
White raised $35 million in less than a month for ChartHop's previous round in 2021. The market quickly turned against him.
"There was basically a tremendous reversal in the speed at which investors were prepared to move," said White, whose business offers cloud technology to human resources departments.
Whatever comfort White may have experienced in January rapidly vanished last week. ChartHop presented its annual revenue launch on March 16, a Thursday, at the DoubleTree by Hilton in Tempe, Arizona. White's phone was inundated with texts while he spoke in front of more than 80 employees.
Upon leaving the stage, White was greeted by hundreds of anxious messages from other founders regarding Silicon Valley Bank, whose stock had fallen more than 60% as a result of the company's announcement that it was seeking to raise billions of dollars in cash to cover declining deposits and poorly timed investments in mortgage-backed securities.
Startup leaders were frantically trying to decide what to do with their money, which was being held at the 40-year-old company that had long been regarded as a pillar of the IT sector.
"This is not like FTX or whatever," White stated in reference to the collapse of the infamous cryptocurrency exchange late last year. "SVB is a highly professionally run bank."
Nevertheless, a bank run had already begun, and by Friday, SVB had been taken over by authorities, becoming the second-largest bank collapse in American history. Because ChartHop banks with JPMorgan Chase, the business was not directly affected by the crash. White, however, said that many of the clients of his business had their deposits with SVB and were now unsure about their ability to make ends meet.
Although the deposits were eventually backstopped last weekend and the bank's government-appointed CEO made an effort to convince customers that it was open for business, Silicon Valley Bank's future is still in a lot of doubt, further complicating the already difficult startup funding situation.
SVB was the market leader in so-called venture debt, lending money to risky start-up businesses in the software, pharmaceutical, and other industries, including robots and climate technology. It is now commonly anticipated that such financing will be more costly and scarcer.
In an industry already struggling with rising interest rates and persistently high inflation, White claimed that SVB had undermined industry confidence.
According to the PitchBook-NVCA Venture Monitor, exit activity for venture-backed companies fell more than 90% year on year in the fourth quarter to $5.2 billion, the lowest quarterly total in more than a decade. The number of transactions fell for the fourth quarter in a row.
According to a Trade Algo report, funding was down 63% in February from $48.8 billion the previous year. Late-stage financing was down 73% year on year, while early-stage funding was down 52%.
Before and after the SVB collapse, Trade Algo spoke with more than a dozen startups and venture capitalists about how they are navigating the perilous climate.
David Friend, the CEO of cloud data storage firm Wasabi Technologies and a tech industry veteran, went to the fundraising market last spring in an attempt to raise fresh capital while public market multiples for cloud software were falling.
Wasabi had raised its last round a year before, when the market was buzzing, IPOs and special purpose acquisition companies (SPACs) were brisk, and investors were high on cheap interest rates, economic stimulus, and rocketing revenue growth.
Some of his investors had pulled out by last May, according to Friend, forcing him to repeat the procedure. Raising funds was "extremely distracting," consuming more than two-thirds of his work during a seven-month period and 100 investor presentations.
"The world was falling apart as we were putting the transaction together," said Friend, who co-founded the Boston-based firm in 2015 and previously created several other companies, including data backup vendor Carbonite. "At the moment, everyone was terrified. Investors were basically drawing in their horns, the SPAC market had collapsed, and IT company values were falling."
According to Friend, the market usually recovers, but he believes that many businesses lack the necessary experience and cash to survive the current storm.
"Things would have come apart if I hadn't had a solid management team in place to handle the firm day to day," Friend stated in an interview before SVB's demise. "I believe we made it, but if I had to go back to the market right now and raise additional money, I believe it would be exceedingly tough."
Tom Loverro, an investor at Institutional Venture Partners, predicted a "mass extinction event" for early and mid-stage startups on Twitter in January. He claims that it will make the 2008 financial catastrophe "appear quaint."
Loverro was referring to the era when the market began to flip in late 2021. In November of that year, the Nasdaq reached an all-time high. As inflation began to rise and the Federal Reserve warned that interest rate rises were on the horizon, several VCs advised their portfolio businesses to raise enough capital to last 18 to 24 months, because a huge pullback was on the way.
Loverro stated in a widely circulated tweet that a "flood" of businesses will try to obtain financing in 2023 and 2024, but that some will not be financed.
Next month marks the 18-month anniversary of the Nasdaq top, and there are few signals that investors are ready to return to risk. Since late 2021, there hasn't been a big venture-backed tech IPO, and none appear to be on the horizon. Meanwhile, late-stage venture-backed businesses such as Stripe, Klarna, and Instacart have seen their valuations plummet.
In the absence of venture investment, cash-strapped firms have been forced to reduce their burn rates in order to lengthen their cash runway. According to the website Layoffs.fyi, over 1,500 IT businesses have let off a total of nearly 300,000 individuals since the beginning of 2022.
Hundreds of IT businesses rely on Kruze Consultancy for accounting and other back-end services. According to the firm's aggregated customer data, which it shared with CNBC, the typical company in January 2022 had 28 months of runway. This decreased to 23 months in January of this year, which is still a record. It was less than 20 months at the start of 2019.
According to Madison Hawkinson, an investor at Costanoa Ventures, more startups will fail this year than usual.
"It's going to be a very heavy, very unpredictable year in terms of just the viability of certain early-stage firms," she told Trade Algo.
Hawkinson has a background in data science and machine learning. It's one of the few startup hotspots, thanks in large part to the buzz surrounding OpenAI's ChatGPT chatbot, which went viral late last year. Being in the right location at the right time, however, is no longer sufficient for an ambitious entrepreneur.
Entrepreneurs can expect "substantial and heavy scrutiny" from venture funders this year rather than "rapid choices and speedy movement," according to Hawkinson.
She maintained her passion and hard effort. Earlier this month, Hawkinson conducted a demo event in New York with 40 founders of artificial intelligence firms. She was "struck" by their flawless presentations and good spirit in the midst of the industry's gloom.
"The majority of them stayed till 11 p.m.," she claimed. "The event was scheduled to finish at 8 p.m."
But, firm CEOs are under pressure in many sectors of the startup economy.
Bolster CEO Matt Blumberg stated that founders are naturally optimistic. He founded Bolster in the midst of the epidemic in 2020 to assist businesses in hiring CEOs, board members, and consultants, and he currently works with hundreds of firms while also investing in venture capital.
Even before the SVB collapse, he'd witnessed how challenging the market had become for startups following a string of record-breaking fundraising years and a prolonged period of VC-subsidized development.
"I train and teach a lot of entrepreneurs, and that's the group who can't sleep," Blumberg explained in an interview. "They're gaining weight, and they're not going to the gym because they're stressed out or always working."
Venture capitalists are encouraging their portfolio firms to get used to it. Bill Gurley, a longstanding Benchmark partner who has invested in Uber, Zillow, and Stitch Fix, told Trade Algo last week that the bubbly pre-2022 market is not returning.
"In this situation, my counsel is fairly simple: that what we experienced during the previous three or four years was fiction," Gurley explained. "Take this as normal."
Laurel Taylor was recently exposed to the new normal. Candidly, her firm, announced a $20.5 million funding round earlier this month, just days before SVB became front-page news. Candidly's technology assists consumers in dealing with educational expenditures such as student debt. Taylor said that the fundraising process took her around six months and involved several discussions with investors regarding unit economics, company fundamentals, discipline, and a route to profitability.
Taylor claims that as a female founder, she has always faced more scrutiny than her male colleagues, who have long benefited from Silicon Valley's growth-at-all-costs mentality. More individuals in her network are now witnessing what she has witnessed in the nearly seven years since she founded Candidly.
"A male friend of mine, by the way, chuckled and said, 'Oh, no, everybody's being treated like a female entrepreneur,'" she said.
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