Venture capitalists act wisely when everyone at startups gets fired

To grow as fast and as large as their staggering valuations demanded, too many startups have apparently bloated their balance sheets with expensive hires.

Thankfully, we’ve decided that the problem is the cost of people, not the insane valuations and millions in venture capital that have threatened to stifle fledgling businesses.

It seems that venture capitalists are doing well on both sides of the ledger. It was venture capitalists who dumped most of the $3.5 billion into the local tech sector last year and knowingly inflated the valuations of midsize software companies into the stratosphere.

In the race to keep up with these investments and avoid falling behind on related performance targets, a spending spree ensued, including a hiring frenzy that outpaced the salaries of a few talented software engineers.

Then suddenly, these same investors have adopted the “voice of experience mode,” lecturing founders on the details of unit economics and the importance of cash flow.

“It’s called profitability, stupid! We can’t believe you hired that ex-CBA engineer for $250,000 a year (and installed beer taps) instead of developing prudent capital management habits!

“Sure, it was us who suggested that its total addressable market had tripled due to the global COVID-19 induced wave of digital transformation and insisted it take another $10 million, but what was its LTV:CAC ratio?”

The Investor Advantage

If things take a turn for the worse, and the startup really needs to get money in the bank, there’s always the handy bridging loan or convertible note.

So not only do our friendly investors get to dole out money on great terms, they also get to avoid appreciating their original investment on the books. Neat!

When startups realized that their checkbook cheerleaders were suddenly less enthusiastic about the prospect of growth at all costs, waves of layoffs began.

Mr Yum is just the latest in a string of high-profile startups that are driving up costs.

In May, programming startup Adjunct laid off 60 people, and solar battery financier Brighte laid off 30. Grocery delivery service Voly and clinical trial connector Healthmatch cut their entire workforce in half, and package delivery startup Sendle laid off 27.

Healthcare platform Eucalyptus, widely known as one of Australia’s highest-paid companies, was forced to cut 50 positions, and cryptocurrency marketplace Immutable kicked out the 20 engineers and designers who invented the video game that gave them credibility in the street first. .

In late July, debt collector Indebted showed 40 people off his payroll, and now Mr. Yum has said around 44 people are also off his payroll.

It’s a downsizing blitz, and these are just the ones we know about.

Where once the inboxes of tech journalists (us obsequious dumb scribes) were filled with founders eager to announce the release of every iterative product feature and C-suite hiring, now the silence is deafening.

Asking a founder questions about layoffs amounts to startup betrayal, and those who haven’t hidden behind layers of PR protection spit out answers that suggest the media is responsible for the hype and froth of 2021.

My sincere apologies, I forgot what it was the press investing hundreds of millions of dollars in human resources software that was going to change the world.

quick drop

The speed at which the market has turned is staggering. Interest rates screeched higher, and the volumes of venture capital that had been flooding the young, ambitious, sometimes naive sector veered off course.

Rising interest rates mean that startups, which are financed on the premise that they could turn a profit in the future, are less valuable.

And until interest rates land in a predictable place, those venture capital funds will hang on to the billions of dollars of dry powder and wait until TED spreads settle.

TED spreads are the difference between interest rates on interbank loans and short-term US government debt, and are often used by investors to indicate where interest rates will be in a year or two.

Of course, the good ideas are still being funded. There’s a $100 million Series B waiting here, another $50 million Series C there, and a founder told me this week that she had no problem depositing $20 million ($29.2 million) because she could show that clients in the pipeline were ready to increase profits.

But while the idea that “good ideas will continue to be funded” is a fixture of startup talk right now, it also sounds like a quiet admission that venture capitalists have spent the last few years funding a whole lot of loot. of doubtful ideas.

It’s a bit of an admission of a “spray and pray” approach, with Australia’s incestuous venture capital industry competing in deals that inherently lift valuations and well-worn return channels that keep those portfolio valuations nice and plump.

But the idea that profits and profitability only matter now is foreign moral ground for our VC kingmakers, particularly in a world where they a) still have a colossal amount of money waiting, and b) position themselves as mentors, advisors and champions of the Australian start-up ecosystem.

Sure, macroeconomic conditions change and the cost of capital underpins everything high-growth loss-making startups are valued at.

It just feels a bit difficult for founders like Teo, who now had to lay off 44 people to fit a growth profile that, until two months ago, was probably the apple of his venture capitalist’s eye.

And to be fair, he still needs to hit those growth numbers to justify his (likely) valuation of bananas, only now with fewer people.

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