The young savages of the start-up scene are running out of money. Even established players like Tesla and Paypal have to save. They are laying off workers en masse. The US venture capitalist Sequoia is already warning of a “death spiral”.
Hard to imagine, but true: Klarna, valued at 46 billion US dollars and thus the most valuable European start-up, only gave its largest investors a look at the business books until recently. Smaller investors got an online meeting with management. That had to be enough for the decision: money yes or no.
This self-confident appearance of the Swedish payment processor towards its investors was not an isolated case. It has recently established itself across the entire start-up scene. International venture capitalists showered young, up-and-coming companies with money. In the meantime, they could choose their investors. The offers of those who wanted more precise business figures could be turned down in a relaxed manner, as the next investor was already queuing up, for whom a promising business idea alone was enough. Rarely has lack of planning been so easily concealed.
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If investors invest billions of US dollars or euros in companies whose business development and forecasts they don’t even know, then all available alarm bells should actually be ringing. Such behavior failed once before with the dot-com bubble around the turn of the millennium, and it failed in 2008 when banks stopped checking how exactly their real estate loans were actually secured. The result was the biggest financial crisis the world had seen since the end of World War II.
Now it fails again. The monetary authorities calling for the end of their ultra-loose monetary policy on both sides of the Atlantic have unleashed something of a perfect storm. It has been visible on the stock exchange for some time. The US tech index Nasdaq100 has lost almost 30 percent in value within six months. The German TecDax around 27 percent. In an overall weak market, tech stocks in particular have been sold for months.
Anyone who wants to avoid the word crash speaks of a strong correction – but that is more of a whitewash. After all, how else could the courses of Paypal, Zalando or Delivery Hero be described other than with the word crash? Or Netflix, Pinterest and Coinbase? They all lost 60, some more than 70 percent of their value within a year.
Because of the rising interest rates, investors are suddenly looking very closely again and are no longer adding billions by billions if the profit zone is not approaching. Suddenly, investments are once again subject to conditions. Investors want to see progress in sales and profits. Market penetration alone is not enough. Among others, the US venture capitalist Sequoia caused a stir, warning of a “death spiral” in a letter to its companies. It was said that only those companies would survive the coming months that could get their costs under control the fastest.
This is a problem, especially for small to medium-sized start-ups that are not yet well established on the market. They live from the trust of their investors in their own business idea. There is often still a long way to go before profitability and a major establishment on the market. The turnaround in interest rates comes at the wrong time for them. They have no reserves, but need a lot of money to drive the expansion. Ironically, the young wild ones, celebrated in the corona pandemic, are now threatening to run out of air.
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Klarna has announced that it wants to lay off ten percent of its 7,000 employees worldwide. The delivery service Gorillas is laying off around half of its administration with 300 employees. The Berliners have been looking for investors since the beginning of the year, but have not been able to complete the financing round to date. Not even a sale works at the moment. As the Handelsblatt reports, the commissioned investment bank JP Morgan has not found any interested parties to date.
The neobank Nuri has meanwhile laid off around a quarter of its employees. “The market is currently experiencing seismic shifts,” said CEO Kristina Walcker-Mayer, explaining the move. Competitor Kontist also recently laid off 50 employees. The delivery service Getir 4000. And the start-up investor Rocket Internet also has to cut jobs. According to the industry service Finance Forward, employees at the Global Founders Capital fund as well as at the investor Flash Ventures have to go. As a company, you will “most likely die if you delay measures,” CEO Oliver Samwer wrote in a letter.
As with the US investor Sequoia, these are surprisingly clear words that almost contain some desperation. It is understandable when even established players such as Paypal or Tesla have to say goodbye to employees. Elon Musk recently announced that he wants to lay off around ten percent of his employees. With around 100,000 employees, around 10,000 of them would have to vacate their jobs. Hundreds of employees also have to leave PayPal.
Alex von Frankenberg, Managing Director of High-Tech Gründerfonds, puts it a little more rationally. “It is now becoming more important to pay attention to the balance between growth and profitability,” he said in an interview with Wirtschaftswoche. “If I can get new money without any problems, I can step on the gas without worrying about losses – and grow as much as possible. When raising capital becomes more difficult, you have to pay more attention to profitability. The screw needs to be readjusted for some start-ups.”
The fact that the books remain and investors are more or less forced to invest blindly, as in the case of Klarna, will be a thing of the past for the time being. Numbers count in the now. Black numbers.
The article “Central banks are turning off the money supply: Startups are stuck in a “death spiral”” comes from WirtschaftsKurier.