SVB’s failure is a double whammy for venture-immersive startups

ChartHop CEO Ian White breathed a sigh of relief in late January after the cloud software launch raised $20 million funding round. He had started the process six months earlier during a brutal period for tech stocks and the downturn in venture funding.

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

“There was 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.

Whatever comfort White felt in January quickly evaporated last week. On March 16th – Thursday – ChartHop held its annual earnings launch at the DoubleTree by Hilton Hotel in Tempe, Arizona. As White spoke to more than 80 employees, his phone was blowing up with messages.

White walked off the stage to find hundreds of panicked messages from fellow founders about Silicon Valley Bank, whose shares fell more than 60% after the firm said it was trying to raise billions of dollars in cash to offset deteriorating deposits and untimely investments in mortgage-backed securities.

Startup executives struggled to figure out what to do with their money, which was locked up in the 40-year-old firm, long known as a mainstay of the technology industry.

“My first thought was like, ‘this isn’t like FTX or anything,'” White said of the cryptocurrency exchange, which collapsed late last year. “SVB is a very well-run bank.”

But the banks kicked in, and by Friday, SVB had been seized by regulators in the second-largest bank failure in US history. ChartHop banks with JPMorgan Chase, so the company was not directly exposed to the collapse. But White said many of his startup’s customers have been keeping their deposits with SVB and are now unsure if they will be able to pay their bills.

While deposits were finally underpinned last weekend and SVB’s government-appointed CEO sought to reassure clients that the bank was open for business, Silicon Valley Bank’s future is highly uncertain, further hampering an already tight funding environment of startups.

SVB was a leader in so-called venture debt, providing loans to early-stage venture companies in software, drug development and other areas such as robotics and climate technology. Such capital is now expected to be less available and more expensive.

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

Exit activity at venture-backed startups in the fourth quarter plunged more than 90% from a year earlier to $5.2 billion, the lowest quarterly amount in more than a decade, according to data from PitchBook – NVCA Venture Monitor. The number of transactions decreased for the fourth quarter in a row.

In February, funding fell 63% from $48.8 billion a year earlier, according to a Crunchbase funding report. Late-stage funding is down 73% year-over-year, and early-stage funding is down 52% over the period.

David Friend, a tech industry veteran and CEO of a cloud storage startup Wasabi Technologieswent public last spring in a bid to find fresh cash as public market ratios for cloud software plummeted.

Wasabi had raised its previous round a year earlier when the market was roaring, IPOs and special purpose acquisition companies (SPACs) were booming and investors were intoxicated by low interest rates, economic stimulus and soaring earnings growth.

By last May, Friend said, several of his investors had pulled out, forcing him to restart the process. Raising money was “very distracting” and took up more than two-thirds of his time over nearly seven months and 100 investor presentations.

“The world was falling apart while we were doing the deal,” said Friend, who co-founded the Boston-based startup in 2015 and previously launched a number of other ventures, including data backup provider Carbonite. “Everybody was scared at the time. Investors were just pulling away, the SPAC market had collapsed, tech company valuations were collapsing.”

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

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

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

Loverro was going back to the period when the market turned, starting in late 2021. The Nasdaq hit its all-time high in November of that year. As inflation began to soar and the Federal Reserve signaled that interest rate hikes were on the way, many venture capitalists told their portfolio companies to raise as much cash as they needed to last 18 to 24 months because a mass retreat was looming .

In a tweet that was widely circulated in the tech world, Lovero wrote that a “stream” of startups would try to raise capital in 2023 and 2024, but some would not be funded.

Next month will mark 18 months since the Nasdaq’s peak, and there are few signs that investors are ready to return to risk. There hasn’t been a notable venture-backed tech IPO since late 2021, and one doesn’t appear to be on the horizon. Meanwhile, late-stage venture-backed companies such as Stripe, Klarna and Instacart dramatically lower their grades.

In the absence of venture funding, loss-making startups had to reduce their burn rates to expand their cash line. Since the start of 2022, approximately 1,500 tech companies have laid off a total of nearly 300,000 people, according to the website Abbreviations.fyi.

Kruze Consulting provides accounting and other back-end services to hundreds of technology startups. According to the firm’s consolidated customer data, which it shared with CNBC, the average startup had 28 months of runway in January 2022. That fell to 23 months in January of this year, still a historic high. At the beginning of 2019, he was under 20 months.

Madison Hawkinson, an investor at Costanoa Ventures, said more companies than normal will die this year.

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

Hawkinson specializes in data science and machine learning. It’s one of the few hot spots in startup land, thanks in large part to the buzz surrounding an OpenAI 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.

Founders should expect “significant and heavy due diligence” from venture capitalists this year instead of “quick decisions and quick moves,” Hawkinson said.

Enthusiasm and hard work remain, she said. Hawkinson hosted a pitch event with 40 AI founders in New York earlier this month. She said she was “shocked” by their polished presentations and their positive energy amid the industry-wide gloom.

“The majority of them ended up staying until 11 p.m.,” she said. “The event was supposed to end at 8.”

Matt Bloomberg, CEO of Pad, said the founders were optimistic by nature. He founded Bolster at the height of the pandemic in 2020 to help startups recruit executives, board members and advisors, and now works with thousands of companies while making venture investments.

Even before SVB’s bankruptcy, he had seen how tough the market had become for startups after consecutive record years for funding and a long period of VC-subsidized growth.

“I train and mentor a lot of founders, and this is the group that can’t sleep at night,” Bloomberg said in an interview. “They gain weight, they don’t go to the gym because they’re stressed or they work all the time.”

VCs tell their portfolio companies to get used to it.

Bill Gurley, longtime partner at Benchmark, who supported Uber, Zillow and Stitch Fixsaid of Bloomberg Emily Chang last week that the pre-2022 bubble market will not return.

“In this environment, my advice is pretty simple, which is — what we’ve been through the last three or four years has been a fantasy,” Gurley said. “Let’s assume that’s normal.”

Laurel Taylor recently had a crash course in the new normal. Her launch, frankly, announced a $20.5 million funding round earlier this month, just days before SVB became front-page news. Candidly’s technology helps users manage education-related expenses like student debt.

Taylor said the fundraising process took her 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’s always had to deal with more scrutiny than her male counterparts, who for years have had to bask in Silicon Valley’s growth-at-any-cost mantra. More people in her network are now seeing what she’s been through in the nearly seven years since she started Candidly.

“A friend of mine, who happens to be a man, laughed and said, ‘Oh no, they’re all treated like female founders,'” she said.

WATCHING: The cash crunch could lead to more mergers and acquisitions and faster tech IPOs