From euphoria to hysteria – this is the most accurate description of what is happening in the venture capital industry today and is projected directly onto start-ups. It hasn’t reached Israel yet, but some of the events of the past few days should worry Israeli entrepreneurs. Not necessarily because the status of their companies is deteriorating or because they are about to run out of money, but because venture capitalists have gone hysterical.
The world’s largest funds, from Sequoia to Y Combinator, have released terrifying pitches that have not only been sent to their portfolio start-ups, but have also been made public.
Headlines are dramatic and warn of the Armageddon that is about to land on the heads of startups and therefore requires drastic measures. These measures were indeed taken this weekend by two companies which were not at all among the immediate suspects of the rationalizations and layoffs. The first, the cybersecurity cloud company Lacework, which announced the layoff of 300 workers who represent 20% of its workforce. At the same time, fintech company Bolt also announced a massive reduction of 240 of its employees. It’s not that surprising, in light of the recent wave of layoffs that swept through Silicon Valley, but corporate identity is what should set off alarm bells among entrepreneurs.
To date, the cybersecurity field has been immune to layoffs that have focused primarily on fintech and e-commerce. Additionally, Lacework’s technology is considered one of the most promising in its field. In his case, as in Bolt’s, it’s not a lack of cash that dictates cuts. The CEO of Lacework explained on the company’s blog that the decision to part ways with some employees was part of a structural change and adjustments to plans to the new reality.
Bolt, who is also not expected to face a cash crunch anytime soon, justified the move with similar statements. Both companies have grown strongly in recent years not only in money but also in the workforce that will now pay the price. In Bolt’s case, this is a particularly painful event for some employees because some have taken out loans from the company to convert their expired options into stock and now if they cease to be employees of the company, they will be required to repay them within three months.
These are two cash-packed companies that completed their latest fundraising just a few months ago. Lacework raised $1.3 billion in February 2022 at a pre-cash valuation of $8.3 billion. Bolt, which until recently was considered one of the most promising fintechs, received $355 million in the last fundraising round in January this year at a pre-market valuation of $10.5 billion. silver. Among the investors was the financial giant BlackRock. In total, since their inception, Lacework and Bolt have raised $1.9 billion and $1.3 billion, respectively.
What happened between January and May 2022? It’s true that the public market has collapsed, but if you look a little deeper, public companies aren’t firing yet, even those that have downgraded their forecasts and seen their shares fall 80%. Why does the private market react on the one hand late, but on the other hand much more violently?
The answer lies in one word: fear. But the fear is not that of entrepreneurs who know the product, their customers and their employees, but the fear of venture capitalists about their future and the anger of investors who have poured tens of billions of dollars into their funds these last years. Venture capitalists have strutted like peacocks in recent years because it seemed like everything they touched turned to gold. Over the past three years, the average internal return of the venture capital industry has increased by around 30%, according to current figures. But now everyone remembers that this is a paper comeback, and the paper is starting to catch fire. Funds understand that actual returns will be far from it, while investors (limited partners) already understand that in some funds, especially younger and bolder ones, return will be a matter of luck to a large extent and not really a matter of scholarship. analysis. This explains the panic that is gripping fund managers.
Fintechs in the crosshairs
The gloomy picture that emerges from fund actions is the fear of presenting negative returns and the difficulty of raising new capital for the funds. As a result, the ultimate goal at the moment is to avoid rounds down, as such a move will force them to acknowledge the loss.
The funds also understand that it will be more difficult to attract casual investment entities to another private round, because unlike in the past, the stock market today has become more attractive after the brutal collapse. Therefore, the funds will try to push companies, especially unicorns that have already raised $1 billion and more, to survive on the money raised until the IPO market beats. its full and once again ready to absorb business. worth billions of dollars. But along the way, the funds could do real damage to their portfolio companies and also become a self-fulfilling prophecy about the tech job market and general economic situation.
So far, this phenomenon has not reached Israel, but it is hard to believe that local businesses will remain immune. Most at risk are Israeli unicorns that have raised foreign funds worth more than $5 billion and are unprofitable, such as Lacework and Bolt. The area of fintech is particularly notable as it attracted the most investment last year and saw the biggest increase in value levels.
Prior to Bolt, layoffs had already been recorded at trading company Robinhood as well as Swedish buy-it-now firm Klarna, which laid off 700 employees earlier this month. Meanwhile, layoffs in local high tech are marginal compared to what is happening in the United States because although the local ecosystem has also lost proportions over the past two years, it has not reached the extent to which this has happened in the United States.
Local funds that have been criticized more than once in good years for being too conservative and carrying out lengthy due diligence processes, have not gotten carried away with funding cycles and high valuations, so they are a little more relaxed than their American counterparts. Local VCs have held preparatory talks with their entrepreneurs, asking them to make plans to survive without raising new capital for 18-24 months, but in most cases this is, at least for now, emergency plans.