SVB’s failure is a double whammy for startups dealing with the downturn in enterprise

ChartHop CEO Ian White breathed a sigh of relief in late January when his cloud software startup raised a $20 million funding round. They started the process six months ago during a brutal period for tech stocks and a downturn in venture funds.

For ChartHop’s first round in 2021, White took less than a month to raise $35 million. The market hastily turned against him.

“There was a complete reversal of the pace at which investors were willing to move,” said White, whose company sells cloud technology used by human resources departments.

Whatever comfort White was feeling in January quickly evaporated last week. On March 9 – Thursday – ChartHop held its annual revenue kickoff at the DoubleTree by Hilton Hotel in Tempe, Arizona. As White was speaking in front of more than 80 employees, his phone flooded with messages.

White stepped off the stage to find hundreds of panicked messages from other founders about the Silicon Valley bank, whose stock was down more than 60% after the firm said it was looking to raise billions of dollars in cash to make up for deteriorating deposits and bad times. was trying Investing in mortgage-backed securities.

Startup executives were scrambling to figure out what to do with their money locked up at the 40-year-old firm, long known as a linchpin of the tech industry.

“My first thought, I was like, ‘this isn’t like FTX or something,'” White said of the cryptocurrency exchange that imploded late last year. “SVB is a very well managed bank.”

But one bank kept going, and by Friday SVB had been seized by regulators in the second largest bank failure in US history. with ChartHop Banks JPMorgan Chase, so the company was not at direct risk for collapse. But White said many of his startup’s customers had kept their deposits at SVB and were now unsure whether they would be able to pay their bills.

While deposits were halted last weekend and SVB’s government-appointed CEO tried to reassure customers that the bank was open for business, the future of the Silicon Valley bank remains very uncertain, and already troubled. Disruption in the startup funding environment.

SVB was a pioneer in so-called venture loans, providing loans to risky early-stage companies in software, drug development and other sectors such as robotics and climate-tech. It is now widely expected that such capital will be less available and more expensive.

White said the SVB has shaken the confidence of an industry already grappling with rising interest rates and extremely high inflation.

Exit activity for venture-backed startups in the fourth quarter fell more than 90% from a year earlier to $5.2 billion, the lowest quarterly figure in more than a decade, according to data from PitchBook-NVCA Venture Monitor. The number of deals declined for the fourth consecutive quarter.

Funding in February was down 63 percent from $48.8 billion a year ago, according to a Crunchbase funding report. Late-stage funding is down 73% year-over-year, and early-stage funding was down 52% over that stretch.

CNBC spoke with more than a dozen founders and venture capitalists before and after the SVB meltdown about how they’re navigating the uncertain environment.

David Friend, a tech industry veteran and CEO of cloud data storage startup Wasabi Technologies, turned to the fundraising market last spring in an effort to find fresh cash, as public market multiples for cloud software plummeted.

Wasabi made its last run a year ago, when the market was humming, IPOs and special purpose acquisition companies (SPACs) were booming and investors were intoxicated by low interest rates, economic stimulus and rocket revenue growth.

By last May, Friend said, many of his investors had backed out, forcing him to start the process all over again. Raising money was “very distracting” and took up more than two-thirds of his time, around seven months and 100 investor presentations.

“The world was falling apart as we were putting together a deal,” said Friend, who co-founded the Boston-based startup in 2015 and has launched several other ventures, including the first data backup vendor Carbonite. “At that point everybody was scared. Investors were just pulling their horns, the SPAC market was falling apart, valuations of tech companies were falling.”

Mitra said the market always bounces back, but he feels many startups don’t have the experience or capital to weather the current storm.

In an interview before the collapse of SVB, Friend said, “If I didn’t have a good management team running the company day-to-day, things would have fallen apart.” “I think we survived, but if I had to go back to the market now and raise more money, I think it would be extremely difficult.”

In January, Tom Loverro, an investor at Institutional Venture Partners, shared a thread on Twitter predicting a “mass extinction event” for early- and mid-stage companies. He said it would make the 2008 financial crisis “bizarre”.

Lovro was listening to the period when the market starts in late 2021. The Nasdaq reached its all-time high in November of that year. As inflation began to rise and the Federal Reserve indicated that interest rate hikes were on the way, many VCs told their portfolio companies to raise as much cash as they would need to last 18 to 24 months, because A massive pullback was coming.

In a tweet widely shared in the tech world, Lovro wrote that a “flood” of startups would seek to raise capital in 2023 and 2024, but some would not receive funding.

Next month will be 18 months after the Nasdaq peak, and there are few signs that investors are ready to return to risk-on. 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 are seeing their valuations drop dramatically.

In the absence of venture funding, money-losing startups have had to cut their burn rates to extend their cash runway. According to the website Layoffs.fyi, since the beginning of 2022, about 1,500 tech companies have laid off a total of about 300,000 people.

Cruz Consulting provides accounting and other back-end services to hundreds of tech startups. According to the firm’s consolidated client data, which it shared with CNBC, the average startup had a runway of 28 months in January 2022. It came down to 23 months in January this year, which is still a historic high. In early 2019, it was less than 20 months.

Madison Hoskinson, an investor at Costanoa Ventures, said more companies will go down this year than usual.

“It’s definitely going to be a very heavy, very transformative year in terms of the viability of some of the early stage startups,” he 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, that went viral late last year. Yet, being in the right place at the right time is no longer enough for an aspiring entrepreneur.

Hawkinson said that founders should expect “critical and heavy due diligence” from venture capitalists this year rather than “quick decisions and swift movements.”

The enthusiasm and hard work remains, he said. Hoskinson hosted a demo event for artificial intelligence companies in New York earlier this month with 40 founders. She said she was “surprised” by their polished productions and positive energy amidst the darkness of the industry.

“Most of them stayed till 11 pm,” she said. “The event was supposed to end at 8.”

But company leaders in many areas of the startup economy are feeling the pressure.

Bolster CEO Matt Blumberg said the founders are optimists by nature. They bolstered the peak of the pandemic in 2020 by helping startups hire executives, board members and mentors, and now work with thousands of companies making venture investments.

Even before the failure of SVB, he saw how difficult the market had become for startups after consecutive record-shattering years of funding and an extended stretch of VC-subsidized growth.

“I coach and mentor a lot of founders, and this is a group that can’t sleep at night,” Blumberg said in an interview. “They’re gaining weight, they’re not going to the gym because they’re stressed or working out all the time.”

VCs are asking their portfolio companies to get used to it.

Bill Gurley, longtime Benchmark partner who supported Uber, Zillow And stitch fixEmily Chang of Bloomberg told last week that the frothy market before 2022 is not coming back.

“In this environment, my advice is very simple, which was the fantasy we lived in for the last three or four years,” Gurley said. “Guess it’s normal.”

Laurel Taylor recently got a crash course in the new normal. His startup, Candidate, announced a $20.5 million funding round earlier this month, just days before SVB became front-page news. Candid’s technology helps consumers deal with education-related expenses like student loans.

Taylor said the fundraising process took them about six months and involved many conversations with investors about unit economics, business fundamentals, discipline and the path to profitability.

As a female founder, Taylor said she has always faced more scrutiny than her male counterparts, who for years enjoyed Silicon Valley’s growth-at-cost mantra. More people in her network are now seeing what she’s experienced in the six years since she started Candidly.

“A friend of mine, who is male, laughed and said, ‘Oh no, everyone is behaving like a female founder,'” she said.

Correction: This article has been updated to reflect that ChartHop held its annual revenue kickoff on Thursday, March 9, at the DoubleTree by Hilton Hotel in Tempe, Arizona.

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