Silicon Valley Investors Say An 'Extinction Event' Is Coming For Startups

03/07/2023, 20:13 Silicon Valley Investors Say an 'Extinction Event' Is Coming for Startups
Arantza Pena Popo/Insider
TECH
Silicon Valley is bracing for a 'Darwinian

moment for startups' in late 2023
Rob Price, Ben Bergman, and Melia Russell
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S
ilicon Valley is bracing for what it fears will be an "extinction event"
threatening the survival of hundreds of startups.
After an unexpected COVID-19 era boom, in which startups nearly doubled what they
raised from venture capitalists — and the subsequent bust due to rising inflation and
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lingering supply chain issues — the economic landscape is dire for many venture
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capital-backed tech businesses.
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While these pandemic-era funding rounds helped buoy many startups, investors,
H O M E PAand
entrepreneurs G Eindustry watchers believe that the party is now officially over for
https://www.businessinsider.com/silicon-valley-fears-exctinction-event-startup-failure-rate-increase-2023-6 1/12
Silicon Valley — and they're worried about how the hangover is likely to get much
worse.
The data, they argue, shows a perfect storm of factors that will prompt an abnormally
high wave of startup failures: A drought in venture capital is spreading through the
valley as VC investments into startups drop for the sixth consecutive quarter.
Similarly, venture debt, another funding source, has cooled since the start of the
year. The IPO market has also shriveled, taking a once-reliable escape route off the
table.
Meanwhile, tech companies permeate throughout every industry and there are more
startups in the market than ever before. But huge numbers of them have less than 12
months of run-way in the tank.
All this means that founders in need of cash are now facing a precipitous drop in the
amount of investment available to them.
"Many startups won't see the funding that they rely on to continue," said Jennifer
Neundorfer, a general partner at early-stage investment firm January Ventures. "I do
think that this is a Darwinian moment for startups."
Some fear this crisis may be worse than the "dot-com"

crash of the early 2000s
I
n March 2020, the influential VC firm Sequoia Capital warned the pandemic
could cause economic instability and resultant issues for startups — from a
drop-off in VC funding to weak sales and painful layoffs.
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ButMain content
despite the initial panic the "Black Swan" event, as Sequoia called it, didn't
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materialize. US venture-backed companies actually raised $329.9 billion in 2021.
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That's nearly double the previous record of $166.6 billion raised in 2020. (In 2022,
that H OM
had E PAto
fallen G$288.3
E billion, most of which was raised earlier in the year.) It
turned out that keeping people locked inside and glued to their screens was a huge
boon for tech companies.
Venture capital is a cyclical business, but investors say that boom helped suppress
startup failure rates, because companies found it easier than ever to access capital
when they needed it.
However, the afterglow of the pandemic's huge funding rounds is waning and
another analogue is echoing through the valley: The infamous "dot-com" crash of
2000, where a generation of internet startups collapsed because they were
overvalued and wildly unprofitable after growing on the back of huge venture capital
investment.
Tom Loverro, a investor at 40-year-old Bay Area venture capital firm IVP, has been
loudly warning for months on Twitter and in media interviews about a coming "mass
extinction event" for startups. But Loverro believes because of tech's size and
ubiquity across industries today, the upcoming crash may actually be far worse than
the 2000s.
"The total number of companies that will ultimately do down rounds, go out of
business, that sort of thing, will be greater this time around," he told Insider.
The data suggests a blood bath is coming
O
ver the last year, the mood in Silicon Valley has darkened. Rampant
inflation prompted the United States Federal Reserve to raise interest rates
to its highest levels in 15 years. The spectacular implosion of Silicon Valley
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Bank — a key funder and financial institution for many tech firms — shook the
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industry. Now, investors and industry observers are nervously eyeing an array of
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concerning data points.
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H O M E PA G E
The total volume of venture capital investment into US startups has slumped for six
consecutive quarters, according to data firm Pitchbook. Venture debt — an
alternative funding source for startups that doesn't involve equity — has also
dropped, it found.
After a COVID boom, the amount of venture capital investme

startups is dropping
US venture capitalist deal volume
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Note: 2023 figures are year-to-date, and will rise through the rest of the year.
Chart: Andy Kiersz/Insider • Source: PitchBook
"We're in turbulent and volatile times. It's almost impossible for startup companies to
get funded" unless they're demonstrating extraordinary growth and revenue, said
Consuelo Vanderbilt, founder of creative-focused social network SohoMuse and
investor for the Vanderbilt family fortune.
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Since the end of 2021, initial public offerings have been practically unheard of,
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removing a major source of capital infusion for many later-stage startups.
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"Going public right now hasn't been an option and probably won't be an option for
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most of these startups for quite a while," said Cameron Lester, global co-head of tech
investment banking at Jefferies.
While some companies like Instacart, Navan, and Databricks have been chomping at
the bit to go public as soon the IPO market thaws, bankers have given up trying to
predict when that might finally be possible.
"This has been the longest IPO drought I've seen in my career, and I've been doing
this since the late nineties," Lester added.
Numbers of new startups are booming, but most have not rai
post-seed funding yet
Startups grouped by the year of their initial $1M+ seed round, and whether or not they have since rece
seed funding.
No post-seed funding Post-seed funding
2K
2018 2019 2020 2021 2022 2023
Note: 2023 figures are year-to-date, and will rise through the rest of the year.
Chart: Andy Kiersz/Insider • Source: CrunchBase
Meanwhile,
Jump to the total number of early-stage startups has been steadily climbing for
years, which means there are more companies fighting for a shrinking money pool
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and an increasing number of them have yet to raise any post-seed funding.
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For hundreds of startups, the countdown to extinction has begun. A survey
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conducted by January Ventures, a Boston-headquartered early-stage investment
firm, found that more than four-fifths of early-stage startups have less than 12
months available to them on their existing funding at the time.
The vast majority of early-stage startups had less than 12 mo

funding runway at the end of 2022
More than 12
months
19%
Less than 12
months
81%
Chart: Andy Kiersz/Insider • Source: January Ventures
The data points to one thing, nervous tech insiders say: A startup bloodbath is
coming.
Startups
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are already feeling the squeeze
A
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lmost as soon as Linda Ahrens, the cofounder and CEO of startup Unown,
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started looking for Series A funding for her fashion startup, she could tell
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something had changed.
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She had previously raised around $2.5 million in seed funding in 2019. Ahrens started
trying to raise new capital to fund the company's expansion and extend its runway in
the fall of 2022. Initially, Unown took some "bridge" funding from prior investors to
tide it over. She returned to the search in earnest at the start of 2023.
But investors whom the German entrepreneur knew weren't answering her calls. Her
business was hitting its goals, but all of a sudden no-one was interested. Even a last-
ditch slashing of the startup's prospective valuation — a "down-round," in Silicon
Valley parlance — didn't whet investors' appetites.
"When I went out again in January, this is when it became super difficult," Ahrens
said.
Without a fresh injection of capital, the future of the 20-person company was
suddenly in jeopardy. Unown filed for provisional insolvency in February, a process
when a German business' prospects are in doubt, before ultimately declaring
insolvency in May after efforts to sell the business outright went nowhere.
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Linda Ahrens, cofounder and CEO of German startup Unown, had to shutter her business after failing to raise
fresh funding in early 2023. Anna Dittrich/Unown
"I still believe that we had something, and we — especially, we had something that
created impact and we had the numbers for it," she said. "If the timing had been
different, we would have had a shot."
Over the past year, many startups that rely on Silicon Valley funding have been
steeling themselves for the slowdown to avoid similar fates.
Headcounts have been cut. Focus has shifted to profitability. Some startups raised
more funding than they needed in anticipation of coming capital scarcity. But it may
not be enough.
There have already been some high-profile flame-outs in 2023. Robot-pizza startup
Zume couldn't make it despite $500 million in venture capital investment. Fintech
firm Plastiq has filed for bankruptcy. The search engine Neeva sold itself to
Snowflake, a cloud-based data warehouse firm that went public in 2020.
But many industry-watchers believe the second half of 2023 is when the failure rate
may start to tick up properly.
"I will say, I do think the worst is yet to come," Pitchbook analyst Vincent Harrison
said. He pointed to the vast funding rounds throughout 2021 and early 2022, and the
12-24 months of runway many companies secured in them. "A lot of those companies
have yet to even return to market or attempt to return to market to raise capital."
This winter, EV company Arrival cut about 50% of its staff. In the spring, RapidAPI,
which was previously valued at $1 billion, also laid off half its team. On Twitter,
investor Elad Gil called recent startup layoffs a " "Canary in the coal mine for what is
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coming."
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Search to see more and more 40-50% layoffs (after prior rounds of "13%")....
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Canary
H Oin
Mcoal
E PAmine
G E for what is coming
— Elad Gil (@eladgil) May 8, 2023
Who's at risk? Businesses that are offering less-vital software services may be
vulnerable as their clients cut discretionary spending, Jennifer Neundorfer said.
Crypto startups that raised vast sums before their idiosyncratic bubble popped may
also be in the firing line.
Gené Teare, a senior data editor at startup-tracking service Crunchbase, predicted

one exception: Startups focused on AI. While the overall failure rate will increase
beyond the historic norm, the buzz around AI may allow these firms to flourish.
By and large though, experts think it's less about the sector than the business model:
Is the company generating real revenue? What's its burn-rate like? Are existing
investors willing to prop it up?
"Companies with no revenue are most at risk," Steve Brotman, Managing Partner at
Alpha Partners, told Insider. Brotman believes venture capitalists will shift their
strategy to support their existing portfolios or companies that already have a
potential to generate large revenue. Growth stage firms may also survive, albeit with
restructured ownership and a lower valuation.
Some are rejecting the predictions of an "extinction event" for early stage startups
entirely.
Will Hawthorne, founder of startup M&A advisory firm Avid Capital Advisor and
partner at VC firm Sugar Capital, pointed to the hundreds of billions of dollars of
unspent capital that investors are sitting on. He argued this "dry powder" could help
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alleviate
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"Everybody
Search always says: this is the end, this is it. And then we get into one of these
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boom cycles again," he said. "The pricing may be different. It may be a little slower
than it was over the last three years, but VC's been around for a long time and we
H O M E PA G E
continue to innovate in America. "
Companies will have to show commercial success
T
om Loverro recently got a call from a CEO at one of his portfolio companies.
The company had gone through a painful round of layoffs, and the chief
executive wanted Loverro to come in and help rally the troops.
The Menlo Park-based investor joined a company all-hands, where he explained the
tough economic climate — and what it meant for the startup itself. His advice was
simple: startups now have to prioritize their goals and focus on what matters most to
the business. "And so what that means is: You can't do everything — at least at once."
His guidance also points to a potential way through for businesses trying to weather
the crisis: Clear focus and fiscal discipline.
"Funding successful innovation is not dead, but companies need to deliver tangible
milestones and commercial proof points in order to survive," Mike Ryan, the
cofounder of BulletPoint Network, a firm that analyzes startups, told Insider.
Bridge rounds, as Unown initially did, are also becoming increasingly popular and
accounted for at least 40% of all investments in Series A and Series B in the first
quarter of 2023 — a post-pandemic record.
Other businesses and investors are changing their perception of what success looks
like during an economic downturn. "I've been hearing that raising a flat round is the
new up round," quipped Pitchbook's Harrison.
But other entrepreneurs are already on the receiving end of a more uncomfortable
message
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limping on for another few months in vain. They might even find a home for their
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product
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and team if they can woo a potential buyer before cash runs out.
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"Smart VCs look at the company and say: You're out of money in six months and the
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writing's on the wall," said Hawthorne. He believes entrepreneurs should proactively
think about being acquired or finding another exit strategy.
Even if failure is inevitable, throwing in the towel is acutely painful for any founder.
"It's tough on a personal level because I feel like this is what I spend so much time on,
but I also know that within that period — right, in this time — we created impact,"
said Ahrens, the Unown cofounder.
"It's super hard to stand in front of your people and tell them: This is it."
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03/07/2023, 20:13 Silicon Valley Investors Say an 'Extinction Event' Is Coming for Startups

Arantza Pena Popo/Insider

Silicon Valley is bracing for a 'Darwinian

Some fear this crisis may be worse than the "dot-com"

The data suggests a blood bath is coming

After a COVID boom, the amount of venture capital investme

investment banking at Jefferies.

2018 2019 2020 2021 2022 2023

The vast majority of early-stage startups had less than 12 mo

Chart: Andy Kiersz/Insider • Source: January Ventures

— Elad Gil (@eladgil) May 8, 2023

Gené Teare, a senior data editor at startup-tracking service Crunchbase, predicted

Companies will have to show commercial success

think about being acquired or finding another exit strategy.

Was this article valuable for you?

Jump to Arantza Pena Popo Insider Illustration More...

Terms of Service and Privacy Policy .

Made in NYC Jobs @ Insider

Stock quotes by finanzen.net Reprints & Permissions

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