Due to the pandemic that has taken everyone by surprise and the caution of venture investors, who prefer to wait out difficult times and continue to support only their portfolio companies, young startups now go through hard times. Attracting investment has never been so difficult. That’s why many experts and founders from Silicon Valley predict massive layoffs and the closure of many startups.
Silicon Valley’s leading young technology companies are downgrading their ratings to attract new investment. This phenomenon was investigated by the Financial Times British newspaper.
A striking example of the trend is a startup Confluent, developer of data management systems. When the company’s team entered into negotiations with investors in early 2020, it expected the next round of financing to double its own valuation, as revenue for 2019 increased by almost 100%. Instead, the project, which investors are the star funds like Sequoia Capital, Benchmark Capital and Index Ventures, and in clients – Credit Suisse and Rakuten, was forced to leave the dream of being valued at $5 billion and agree to a more modest $4.5 billion. Coatue Management investment company headed the recently passed round of $250 million.
“And we feel lucky. This is a very difficult time to attract money from private investors,” Confluent CEO Jay Kreps said in FT commentary.
Other projects facing a similar problem include Samsara, a manufacturer of sensors and cameras for industrial enterprises and automobiles (according to FT, a new round is being discussed below the current estimate of $6.3 billion), and TripActions, a developer of control systems for the travel industry (according to FT, discusses a new round below the current valuation of $4 billion).
According to Pitchbook, Valley venture capitalists are sitting on a money bag of $120.4 billion, but are not in a hurry to spend this money, as there is too much uncertainty in the market and the prospects for overcoming the industry from the crisis generated by the coronavirus pandemic are too blurred.
As a result, the founders of young technology companies are forced to agree to the conditions that infrequent daredevil investors offer. Some don’t find sources of support at all and go for unpopular measures like layoffs and severe cost cuts.
“At least for a while, Silicon Valley is not the world of founders any longer. The younger generation of entrepreneurs will have to face a harsh reality,” Rachel Proffitt, partner at Cooley Law Firm said.
According to estimates by the head of the Industry Ventures fund, about 80% of venture capitalists today are ready to invest in startups only at the level of previous or lower estimates of business value.
At the same time, most American startups will start experiencing a shortage of development resources before the economy, according to the IMF forecast, returns to growth at the end of 2020. “Companies will start closing … Waves of layoffs will follow,” the National Venture Capital Association stated in its review last week.222