SVB fail is double-whammy for startups dealing with plunge in venture

ChartHop CEO Ian White breathes a huge sigh of relief after launching cloud software in late January Raised $20 million funding round. He started this process six months before him, at a time when tech stocks were crashing and venture capital was plummeting.

ChartHop’s previous round of 2021 took White less than a month to raise $35 million. The market hastily turned its back on him.

“It’s just a complete reversal of the speed at which investors were willing to move,” said White, whose company sells cloud technology used by human resources departments.

The comfort White felt in January quickly evaporated last week. On Thursday, March 16, ChartHop held its annual earnings kickoff at his DoubleTree by Hilton hotel in Tempe, Arizona. As White was speaking in front of his 80-plus employees, his phone was exploding with messages.

As White walked off stage, he found hundreds of panicked messages from other founders about Silicon Valley Bank investing in mortgage-backed securities.

Startup executives were figuring out what to do with their money, which had been trapped in a 40-year-old company long known as a cornerstone of the tech industry.

“My first thought was, ‘This is not like FTX or anything like that,'” White said of the cryptocurrency exchange that imploded late last year. It’s a bank.”

But the bank run continues, and by Friday the SVB was seized by regulators in the second largest bank failure in US history. ChartHop Bank JP Morgan Chase, and therefore the company was not directly exposed to collapse. But White said many of his startup’s customers keep deposits in his SVB and are unsure if they can pay their bills.

Deposits were eventually withheld over the weekend, and SVB’s government-appointed CEO tried to reassure customers that the bank was operating, but the future of Silicon Valley banks was highly uncertain. It further hinders an already troubled startup funding environment.

SVB was a leader in so-called venture debt, providing loans to risky early-stage companies in areas such as software, drug development, robotics and climate technology.Now such capital is no longer available. , is widely expected to be more expensive.

White said the SVB had shaken confidence in an industry already grappling with rising interest rates and stubbornly high inflation.

Venture-backed startup exit activity fell more than 90% in the fourth quarter to $5.2 billion from the same period last year. PitchBook-NVCA Venture MonitorThe number of deals declined for the fourth straight quarter.

Funding in February fell 63% from the previous year’s $48.8 billion, according to Crunchbase’s funding report. Late-stage funding was down 73% year-over-year, and early-stage funding he was down 52%.

CNBC spoke with more than a dozen founders and venture capitalists before and after the SVB meltdown about how they navigated a volatile environment.

David Friend, tech industry veteran and CEO of cloud data storage startup Wasabi Technologiestook to the funding market last spring to find fresh cash as public market multiples for cloud software plummeted.

Wasabi had raised its previous round of funding a year ago. At this time, the market was booming, IPOs and special purpose acquisition companies (SPACs) were booming, and investors were getting drunk on low interest rates, economic stimulus, and booming earnings.

By May of last year, Friend said some of his investors had pulled out, forcing the process to restart. Fundraising is “very distracting” and over the course of nearly seven months he gave 100 investor presentations and spent more than two-thirds of his time.

Friend, who co-founded the Boston-based startup in 2015 and previously launched a number of other ventures, including data backup vendor Carbonite, said: “At the time, everyone was scared. Investors were just turning the corner, the SPAC market was collapsing, tech company valuations were collapsing.”

Friend said the market will always recover, but he believes many startups don’t have the experience or capital to weather the current storm.

In an interview before SVB’s demise, Friend said: “I think we got away with it, but if we had to go back to the market now and raise more money, it would be very difficult.”

In January, Institutional Venture Partners investor Tom Loverro 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 “look weird”.

Loverro reflected on a period of market reversal from late 2021 onwards. The Nasdaq hit an all-time high in November that year. With inflation starting to spike and the Federal Reserve signaling interest rate hikes were on the way, many VCs are pushing their companies to raise enough cash to last 18 to 24 months. instructed to

In a tweet widely shared in the tech world, Loverro wrote that a “flood” of startups will try to raise money in 2023 and 2024, but some will not.

Next month marks 18 months since the Nasdaq peaked and there are few signs investors are ready to jump into the risk. There have been no notable venture-backed tech IPOs since late 2021, and none appear to be imminent. Instacart I have lowered my rating significantly.

Due to a lack of venture capital, loss-making startups have had to cut their burn rates to expand their cash runway. In total, nearly 300,000 of his jobs have been laid off by about 1,500 tech companies since early 2022, according to the website. layoff.fyi.

Kruze Consulting provides accounting and other backend services to hundreds of tech startups. The average startup had a 28-month runway in January 2022, according to aggregated customer data the company shared with CNBC. That year he dropped to 23 months in January, which is still a historically high number. At the beginning of 2019, it was less than 20 months old.

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

“It’s definitely going to be a very heavy and very volatile year in terms of the viability of some early-stage startups,” she told CNBC.

Hawkinson specializes in data science and machine learning. This is largely due to the hype about his chatbot called ChatGPT in OpenAI that spread late last year, making him one of the few hot spots in the startup world. Still, being in the right place at the right time is no longer enough for aspiring entrepreneurs.

Hawkinson said founders should expect “significant and tremendous hard work” from venture capitalists this year rather than “quick decisions and quick moves.”

Enthusiasm and effort remain, she said. Hawkinson hosted a demo event in New York earlier this month with her 40 founders of artificial intelligence companies. She said she was “shocked” by their sophisticated presentation and positive energy in the darkness of the entire industry.

“Most of them ended up staying until 11 p.m.,” she said. “The event was supposed to end at eight o’clock.”

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

Matt Blumberg Chief Executive Officer Strengthen, said the founders were inherently optimistic. At the height of his 2020 pandemic, he founded Bolster, helping startups hire executives, directors and advisors, and now works with thousands of companies while also making venture investments.

Even before SVB’s failure, he saw how difficult the market was for startups.

“I mentor and coach a lot of founders, and they’re the kind of group that keeps you up at night,” Blumberg said in an interview. “They’re gaining weight. They’re either stressed out or working all the time, so they don’t go to the gym.”

VCs are telling you to familiarize yourself with portfolio companies.

Longtime Benchmark partner Bill Gurley said: uber, Jiro and stitch fixSaid Bloomberg’s Emily Zhang said last week that the frothy market of pre-2022 isn’t coming back.

“In this environment, my advice is very simple: for the last three or four years, what we’ve been living with has been an illusion. ‘Think this is normal.'”

Laurel Taylor recently took a crash course in the new normal. her startup, frankly, announced A few days before SVB made headlines, it raised a $20.5 million funding round earlier this month. Candidly’s technology helps consumers handle education-related expenses such as student loans.

Taylor said the fundraising process took 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 has always had to deal with more scrutiny than male founders who have enjoyed Silicon Valley’s grow-at-all-costs mantra for years. More people in the network are seeing what she’s been through in almost seven years since starting Candily.

“By the way, a male friend of mine laughed and said, ‘Oh no, everyone is treated like a female founder,'” she said.

clock: Funding Shortage Could Lead to More M&A and Accelerate Tech IPOs