Why start-ups could face tough times ahead

In a year when much of the tech industry has pulled back on spending, start-ups have been hit particularly hard. During the pandemic boom, investors were happy to bankroll promising young companies’ growth at any cost. Now, with new funding rounds all but evaporated, cuts are the order of the day. More than 250,000 workers globally were let go from tech companies of all sizes this year, according to job tracker Layoffs.fyi. While that includes big reductions at giants like Meta Platforms and Google, thousands came from smaller, closely held companies facing their first reckoning with a slowdown. More than 500 start-ups closed their doors in 2023, according to equity management firm Carta – and many of those that endured are laying off workers and looking for alternative sources of cash. Serve Automation’s Stellar Pizza, which uses robotics technology to make pizza, is one such business. The company cut half its workforce this year and announced a crowdfunding campaign to try to raise $1.24 million, which it said would allow it to operate for five more months. “It’s a weird time in the venture world,” co-founder Benson Tsai said in an email. “I’m fighting the good fight to keep the business alive.” The tone in most of the industry has changed from the boundless optimism of the latest tech boom. When the last round of layoffs struck in 2020, start-up employees, especially engineers, were nonchalant, knowing they would quickly find another job. Today the industry has become less hospitable. “Salespeople and recruiters are leaving tech entirely” to get new positions, said Roger Lee, founder of Layoffs.fyi. “Even engineers are compromising – accepting roles with less stability, a tough work environment, or lower pay and benefits.” Across tech companies of all sizes, 1,150 firms have cut 256,499 employees, according to Layoffs.fyi. That follows 1,064 companies cutting 164,969 employees last year. Because job losses tend to be concentrated in December and January, as companies plan their budgets for the new year, the worst could still be on the horizon. The whiplash of fortunes has been jarring for some founders. Sri Artham started plant-based Hooray Foods in 2019, and it met with rave reviews for its vegan bacon. The company landed a spot on Whole Foods' shelves and delighted its customers, but struggled to grow fast enough to cover costs. By May or June this year, Hooray’s problems became existential. In retrospect, Mr Artham said he might not have spent so much when times were better on costs like San Francisco office space, though he had limited flexibility because of Hooray’s need for custom manufacturing equipment. Unable to raise more money, in September Mr Artham announced that the start-up would close. “It was disappointing that investors pulled back,” he said. Even companies that raised huge cheques shut down this year. Homebuilder Veev brought in $400 million before announcing it would liquidate its assets in November. Digital-freight logistics company Convoy raised $260 million before ceasing operations. And digital health care service Olive won a $400 million funding round before it closed six weeks ago. In each case, the companies’ latest financings came after they’d already received hundreds of millions. Other start-ups sold themselves at fire-sale prices after conducting layoffs. Videoconferencing upstart Loom had two rounds of job cuts last year, and then sold in October to Atlassian for $975 million – significantly less its previous $1.53 billion valuation. Perimeter 81, a security start-up, laid off workers last December, then sold to Check Point Software Technologies in September for $490 million. That compares with a $1 billion valuation in the start-up’s funding round last year. Max Elder, who is in the process of filing Chapter 7 bankruptcy to wind down his three-year-old plant-based nuggets company Nowadays, says he wishes he had stopped fighting to survive a little earlier. That way, he’d still have some of the $10 million he raised in happier times to pay the legal fees and other costs associated with shutting down a business. Although he may have a buyer for some left-over ingredients, he can’t retrieve them until he pays back rent on the warehouse where they are stored. If it’s impossible to raise money, some start-ups may see a more limited upside to staying in business. With funding tight, the kind of growth enabled by venture capital funding can feel increasingly out of reach. “Is this a question of living or dying?” Mr Elder asks. “Or is this a question of building something at scale?”

Why start-ups could face tough times ahead

After layoffs and closures, surviving companies are finding it difficult to raise money