Tech faces hour of reckoning as fundraising drops, layoffs rise
Tech faces hour of reckoning as fundraising drops,
layoffs rise
By Jon Swartz, USA TODAY 12:55 p.m. EST January 17, 2016
SAN FRANCISCO — Is tech in for a rude awakening this year
after a magic carpet ride the past few years?
The numbers, and recent actions by once high-flying
start-ups, would seem to suggest so.
Consider: Mega-rounds, defined as funding of more than
$100 million for venture capitalist-backed companies, are in free fall. The
rate of private start-ups attaining unicorn status — a valuation of at least $1
billion — are grinding to a crawl. Friday layoffs at tech start-ups, deemed
Black Fridays, are increasing. Bellwether tech stocks such as Apple, Google,
Facebook and Amazon have been taking it on the chin.
"It's a time to recalibrate — so many companies
can't burn extraordinary amounts of money forever," says Sunil Panel,
co-founder of Sidecar, a pioneer in the crowded ride-sharing space that
shuttered operations on Dec. 31.
Last year, Silicon Valley projected unbridled swagger.
Today, "there is definitely an era of reckoning," says Chris Sacca, a
venture investor with stakes in Uber and Twitter. "Reality is setting
in."
A report from PricewaterhouseCoopers and National Venture
Capital Association underscores the chasm: While last year was the second-best
in two decades for venture capital investments, at $58.8 billion, the
fourth-quarter figures marked the smallest amount invested since Q3 2014 ($11.3
billion).
Tom Ciccolella, PwC's U.S. venture capital lead, says the
decline in mega-deals is the first clear sign of a tamped-down market for
funding. The slowdown began late last year, according to several market
researchers.
The number of mega-deals of at least $100 million — 38 in
the fourth quarter of 2015 — was roughly half the 72 in the previous quarter,
according to the KPMG International & CB Insights 2015 Venture Pulse
Report. Mega-rounds in the just-completed quarter raised $11.4 billion — down
44% from Q3 2015 —the lowest level recorded since the first three months of
2013.
More than anything, 2016 marks a "shift to
entrepreneurs valuing quality investors over optimized evaluations," says
Joe Horowitz, managing general partner at Icon Ventures.
The rise of unicorns, meanwhile, slumped to just nine in
the fourth quarter of 2015, compared with 23 in the previous quarter, according
to the report. There are more than 140 private start-ups valued at $1 billion
or more, attaining unicorn status.
Unicorns "is not a term we focus on," says Josh
Reeves, CEO of Gusto, a 300-person company that provides Web-based payroll and
human resources services for small businesses. Gusto, formerly ZenPayroll, was
one of the nine new unicorns in Q4. "We started a company to solve a
problem. That's our focus."
A NEW, MORE SOBER CLIMATE
The shift in mood is illustrated in a spate of layoffs,
closures, changes in CEO and reduced market value for several start-ups.
Last year, out-sized confidence, and valuations, in
start-ups such as Uber and Airbnb was the overriding story line in high-tech.
But the pressure to cash in on sky-high valuations for
mostly unprofitable companies — with intensifying murmurs of another dot-com
meltdown on the horizon — has upended things.
"It's a reversion to the norm," says Charles Moldow,
general partner at Foundation Capital. "Things are cooling off."
How cold? Fewer venture capital investments are echoed in
lower pools raised by the VC firms themselves. The $3.3 billion venture capital
firms raised in the third quarter of 2015 was 33% less than what they raised in
the same quarter a year earlier, according to Thomson Reuters and the National
Venture Capital Association’s Fundraising Report.
"Companies will still raise funding, but at lower
valuations," says Arianna Simpson, a Silicon Valley-based investor.
Tech start-ups are increasingly aware of:
— Layoffs. If 2015 was about expansion, some companies
are ushering in 2016 with cost-cutting and operational efficiency.
GoPro trimmed 7% of its work force this week because of a
weak sales outlook.
Data-analytics firm Mixpanel, valued at $865 million,
last week sliced nearly 20 jobs. Do-it-yourself service Maker Media cut 17 last
week. Wearables start-up Jawbone, a unicorn, late last year slashed 15% of its
staff, or 60 people, and closed its New York office in a move to streamline
operations. Living Social cut 20% of its staff, 200 people, in October.
Evernote, pegged at $2 billion, has had at least two rounds of cuts in recent
months.
Those who aren't firing are doing less hiring. Instacart,
which tripled its workforce to 308 in 2015, laid off five of its nine
recruiters and plans to scale back its hiring push. "We're still growing,
but not at the same pace," says Mat Caldwell, vice president of people at
Instacart.
"Unless you're (an elite) unicorn, you will be
forced to focus on fundamentals for spending, profitability and burn
rate," says Jeff Fagnan, a partner at Accomplice. "There is more
introspection, and that's a healthy thing for the (tech) ecosystem."
— Reduced valuations. Roiling markets and tightened
investments on big-funding rounds has caused early-stage investors to reassess
the value of several start-ups.
Former $1 billion unicorn Gilt Groupe was acquired last
week by Hudson's Bay for $250 million — less than the $280 million it raised in
funding during its 8-year existence. In a valuation prior to the sale, Gilt's
worth was pegged at $600 million.
Foursquare, one of New York's most-heralded tech success
stories a few years ago, this week secured $45 million in funding that Re/code
says values Foursquare at $250 million, less than half the $650 million value
it was assigned in a 2013 funding round. (Foursquare has disputed the report.)
Foursquare CEO Dennis Crowley relinquished his title the day of the funding
announcement.
Fidelity Investments, the Boston-based mutual fund firm,
in November marked down the estimated value of its stake in several start-ups:
Dropbox and Snapchat. Fidelity values Dropbox at 17% less than what it was at
the end of June.
— Scuffling IPO prices. Box and Hortonworks laid the
shaky foundation for tech IPOs last year, and two start-ups that initially
impressed — Fitbit (FIT) and Shopify (SHOP) — now have stock prices at or below
their opening-day public debuts. Twitter, which went public in late 2013, is
trading near an all-time low.
The stock market hasn't been any easier to established
public companies. Last week, shares in Apple (AAPL), Google-parent Alphabet
(GOOGL), Facebook (FB), Amazon (AMZN), Microsoft (MSFT), Yahoo (YHOO) and
Twitter all took a thumping.
A DIFFERENT ERA THAN 2000
All isn't gloomy, however. Tech remains a hotbed for
innovation and funding.
Reflecting their undivided faith in Silicon Valley-based
startups, investors poured $33.9 billion into the region's start-ups in 1,963
deals last year, says Pitchbook, a private capital market researcher. But
activity was down sharply from 2,534 deals in 2014.
The Bay Area accounted for 27% of venture money invested
worldwide and 16% of all deals, Pitchbook said.
"We're in a bit of a different bubble this
time," says Kon Leong, CEO of ZL Technologies, an email and file-archiving
company. "The exuberance now has a foundation" as measured by market
size and sales potential, he says.
There is a silver lining for companies fearful of a
repeat of the dot-com crash 16 years ago.
Although Instacart exists in the same general market as
Webvan, which went bust in 2001, its prospects are much brighter, Simpson says.
The Internet audience is significantly larger — 3 billion now, compared with
500 million in 2000 — and more consumers are likely to use delivery services
than they did back then, investor Simpson says.
The valley, like most industries, is built on cycles,
says Joe Horowitz, managing general partner at Icon Ventures. What goes up, he
says, eventually must come down.
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