Silicon Valley is between deep cuts and bold spending

Silicon Valley is disputed over what to do about a market downturn.

Startups are getting mixed signals as concerns about volatility in the stock market and the prospect of a slowdown clash with record volumes of capital investors ready. Venture capitalists are offering conflicting advice, some encouraging startups to spend faster while others predict a severe recession that will require painful cuts.

The paradox highlights the tension between macroeconomic reality and Silicon Valley’s incentive structure, which encourages founders and investors to spend big in the pursuit of growth and returns. It also underscores the novelty of the current recession: the dot-com crash and the 2008 financial crisis provide little guidance for navigating today’s economic challenges, driven by a combination of the worst inflation in 40 years, Ukraine. Russia’s war, supply-chain disturbances and the biggest interest rate increases in nearly three decades.

“I personally don’t think much can be gained from the previous bust because this particular moment is so unique,” said Arun Mathew, an investor at venture-capital firm Accel. “Everyone is in this moment of uncertainty as to what the next six months or the next 12 months will look like.”

This has created a mess of contradictions. US startups have laid off more than 6,000 employees since early July, according to tracker Layoffs.fyi. Company executives say the hiring plan has been abandoned and the product pivot is underway.

Other startups are moving their employees to beach-resort gateways, raising or announcing their biggest funding rounds, amid the macroeconomic turmoil that’s been business as usual.

Ali Partovi, a longtime early-stage startup investor, remains optimistic. “I don’t think we’re heading into a terrible recession,” he said. “Now is the time to really accelerate and I’m asking others to save your money.”

Mr. Partovi’s argument: Inflation is like a dripping bucket. The money startups are saving today has little value tomorrow, so they are better off investing in the business. In May, Mr Partovi said, his firm Neo’s investment momentum was more than double the monthly average in 2021.

For CEO Lady Sfundzic, nothing has changed about the business of running a startup, she said from Puerto Vallarta, Mexico, while taking a break from activities in a resort town during a company retreat. His two-year-old company Lumos, which helps businesses manage IT spending and compliance, is growing full steam, he said, having grown its workforce by more than 50% this year.

Devin Finzer, CEO of OpenC, a market for non-fungible tokens, or NFTs, is bracing for more bad news. “We need to prepare the company for the prospect of a prolonged recession,” Finzer wrote in a note to his employees in mid-July. The company, which had an eventual value of $13 billion, said it laid off 20% of its workforce.

US startup investment in the second quarter fell more than 23% from the same three-month period the previous quarter and a year ago, according to Pitchbook Data Inc. At the same time, the average deal size for the year so far is the highest on record across almost all stages of startup. Venture capitalists say investors are sitting on huge reserves of cash, but are becoming more selective about where they invest, so more money is concentrated with fewer startups. According to Pitchbook, US venture capitalists have raised $122 billion in new funds in the first half of this year — up 87% of the full-year 2021 record.

Many limited partners, institutions and individuals who invest in venture funds are asking venture capitalists to slow down the pace of investment, startup advisor and investor Elad Gill said in a blog post. Many startup founders say they believe the money will be there when they need it because the venture partners pay comes from fees and profits from investing other people’s money.

In May, Sequoia Capital gave a presentation to all startup founders in its portfolio called “Adapting to Endure,” which advised founders to save cash, cut back, and prepare for a longer recovery. In the first half of the year, Sequoia created 22 more startups, according to a person familiar with the matter, with investments made during the same period a year ago indicating that the firm is unaffected by market volatility. Seventeen of those investments were part of a new startup-accelerator program launched this year, the firm said in May. Sequoia also closed $2.25 billion in fresh funding in July, the person familiar with said.

The startup industry is a microcosm of mixed macroeconomic signals. The US economy shrank in the first and second quarters, meeting the commonly used definition of recession, and the housing market is reeling under rising interest rates. Yet the unemployment rate remains low, at 3.6% in June. And consumers continue to spend even in the face of 9.1% inflation, leading to a pick-up in retail sales in June.

Sometimes, a startup’s response to economic turmoil is determined by the conviction of its founder or investor.

Austin Rosen, chief executive of Electric Feel Entertainment, an entertainment company with a venture-capital arm, said of its portfolio: “We think it’s recession proof.” His startups include a vegan skin care startup, a soda startup, and a brand called Hard Seltzer. “The condition is that families will not rein in spending on these products,” said Mr. Rosen.

Many founders of large startups said they are running short of cash for three to four years, an enormous amount that often requires adjusting recruitment plans. Thumbtack Inc., an app for hiring professionals for home improvements and repairs, had a plan at the beginning of the year to increase its workforce by 60% from the currently more than 1,100, said CEO Marco. Zappacosta said. He said he has reduced it from about 30% to 40%.

OfficeTogether Inc. Amy Yin, founder and chief executive of Keynote, a startup that makes software to help companies with hybrid work setups, said she’s trimming around the edges: fewer meals like free meals and breaks at all company retreats. , something she championed years ago as a key to bonding and morale. Plans are drawn up to move its employees to Nova Scotia in August.

“It’s not the best time to be a super celebrity,” said Ms. Yin.

Velocity Global LLC, a startup that sells software to help companies hire and onboard international employees, raised $400 million in May. Norwest Venture Partners, the largest Czech lead investor in this round in its 61-year history, said firm partner Parker Barrill said: $150 million.

“We are looking forward to investing like never before,” Mr Barrill said. “Shall we be more careful? Certainly.”

Velocity has a money plan. A spokesperson said that among other things, the company intends to move its entire staff to Denver later this year for its annual company party.

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