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This Week in Australian Startups - Issue #16, 29th March 2023
Since the start of 2022, according to Layoffs.fyi we’ve seen 1,751 tech companies make redundancies to the count of 315,284 employees - these are just the numbers that have been reported and verified and the real number would be larger.
At home across Australia and New Zealand we’ve had 58 companies with 3,108 layoffs. Taking the top 5 spots are Xero (800), Atlassian (500), SEND (300), Swyftx (164) and Till Payments (120).
There’s a lot of talk about market conditions, global recession and now the collapse of SVB and what impact that could have to make things worse. Elad Gil wrote an excellent piece recently which dives deep into what’s actually driving this specifically within tech - I’ve summarised the key themes below with my two cents, but would encourage you to read his detailed analysis as well which I’ll link to at the end.
1. The Cost of Capital
Interest rates were very low for the past few years up until recently, and with cash being injected into the economy during COVID it meant there were some very bloated valuations in peak 2020 and 2021. Many of these fundraises were at some ridiculous multiples, some being in excess of 100x ARR.
Capital was relatively easy to find and you didn’t need to have many runs on the board as a startup in order to raise. In general a round of funding should last anywhere between 2 to 4 years, and the need to fundraise again with just under a year of runway remaining.
Depending on how much cash you raised, this is what cash flow looks like;
2.5 years of cash
3 years of cash
4 years of cash
2. The ‘market has changed’
It’s hard to go a day without hearing someone say ‘the market has changed’ and it has.
Since 2020 we had very low interest rates and which meant to money printing and an increase in valuations across both public and private markets leading to over funding and over hiring. The rate of inflation started to increase, and in response interest rates rose.
Interest rates determine how deeply you discount future cash flows, particularly for growth stage companies. When interest rates are higher, growth multiples compress and stock prices drop. The higher interest rates stomped the bubble in public tech company multiples and pushed them back to in range with historical norms. Multiples in the COVID era were the anomaly, not the 14 years prior. We are not going back to 2020-2021 valuation multiples (or anything close to it) until the next bubble. Every $1B in market cap = $100M to $150M in revenue growing 30% a year, $5B in market cap = $500M in forward revenue adding ~$150M in revenue a year (!) Even if interest rates were to drop and SaaS multiples were to rise 50% they would be at roughly 10X forward revenue (up from 6X today). This means every $1B in market cap would need $100M or so of revenue (down from $150M today), growing 30% year over year. A $5B market cap would mean a company with $500M of revenue (down from $750M today) growing 30% year over year. So a company at that scale would need to be adding $150 million *per year* to be worth $5B. A $10B market cap is double that number ($1B in revenue adding $300M a year!). The current period is around historical norms, not an anomaly(!!).
These market changes also means less spending across the board, companies are looking to consolidate and reduce spend.
3. How many companies are actually ‘good’
Good is relative depending on who you ask, but the reality is so many startups have lived beyond their natural expiry date with the cost of capital being so low in the last few years.
Many companies are yet to achieve a true PMF, establish a strong NDR, grow at a steady rate. These same companies that perhaps would have had to pivot or shut down 2-3 years in were able to raise capital for 4 years. We’re now seeing that capital run out, and there’s only a few ways to extend your run way, the most impactful to your bottom line - make layoffs.
4. What does this all mean?
More layoffs and possibly shut downs
Unfortunately, we’re likely only in the first half of this as we’ll see more startups run out of capital in Q3 23 through 2024 needing to extend runway and make further layoffs. In big tech we’re seeing the same outcome but with a lens of efficiency/reducing bloat and focusing on profitable areas of the business - as Zuckerberg puts it, it’s the year of efficiency.
Where layoffs aren’t an option, not feasible or the founders decide against and they can’t raise capital then shutting down starts to look like a good option. It’s important to know when to call it a day and start focusing on something new.
Consolidation and M&A
We’ve gone through a wave of unbundling (think cable TV to Netflix) and now have so many products out there in the market. It’s natural that we may now be on the very early stages of rebundling and that makes it a great time to sell your startup to a large incumbent who is looking to firm their market share and bring a new product to market.
It’s also a great time for PE to snap up low performing startups who have run out of cash and do what they do best.
Realignment and down rounds
Companies that make the decision to do layoffs early with enough cash in the bank will have a red hot crack at achieving profitability and growing into their valuations of previous rounds before investors will consider giving away any more cash.
Mr Yum recently announced a reduction of 40 staff, and COO and Co-Founder Adrian Osman gave this response to a comment;
Then there are companies on the other end, Elad writes:
A number of companies such as Stripe, Instacart (rumored to have repriced 74% from $39B to $10B), and Klarna (valuation drop of 85% from $45B to $6.7B) have proactively written down their companies’ market caps in order to reset prices for their employees and/or fundraises (either private rounds or IPOs). These companies should be applauded for trying to do the wholistic right thing for their shareholders given that comparable public market companies may be down 70-90%.
For a deep dive, check out Elad’s detailed analysis.
Why Aussie tech investors think we’re just in a blip (AFR)
Canva announces new AI design tools and branded workspace features (The Verge)
VC-backed crowdfunding platform Stride Equity is offering a new funding model for startups (Startup Daily)
Nearly 700 women-led startups hit by new delays to $11.6 million Boosting Female Founders grant (SmartCompany)
The Canva brand is now worth more than Woolies, Telstra and Bunnings (Startup Daily)
Annie Parker wraps up as Tech Central head (iTnews)
Till Payments founder Shadi Haddad steps down as CEO (Startup Daily)
Another 40 staff to go at Mr Yum as Australian startup readjusts to market downturn (SmartCompany)
US regulator sues crypto exchange Binance and boss Changpeng Zhao (The Guardian)
Alibaba to Split Into Six Groups and Explore Separate IPOs in Major Shake-Up (The Wall Street Journal)
The upside of the mass tech layoffs (TKer by Sam Ro)
Tech workers feel jilted and betrayed by how firms like Meta and Google handled layoffs. HR professionals say the issue isn't malice, it's just poor planning. (Insider)
7,000 Disney layoffs start this week (Axios)
Disney reportedly shuts down its metaverse division (Engadget)
Listing Jobs but Not Hiring: Indeed Cuts 15% of Staff (Gizmodo)
Apple further cracks down on remote work by 'tracking employee attendance' via badges (9to5Mac)
Remote job options are dwindling (Insider)
More layoff misery could be coming to Salesforce (TechCrunch)
Tech consulting giant Accenture cutting 19K jobs (The Hill)
Netflix's Ad Tier Finally Makes Subscriber Gains (Gizmodo)
Mozilla is creating a startup to build more open and trustworthy AI (The Verge)
I tested Google Bard. It was surprising -- in a bad way (ZDNet)
Zoom’s new AI features help you catch up on meetings you’re late to (The Verge)
ChatGPT Opened a New Era in Search. Microsoft Could Ruin It (WIRED)
Adobe launches generative AI tools aimed at marketers (TechCrunch)
Did OpenAI just have its ‘App Store’ moment? (Fast Company)
Twitter will kill 'legacy' blue checks on April 1 (TechCrunch)
Why advertisers aren’t coming back to Twitter (Vox)
Musk says Twitter now worth $20 billion, less than half what he paid for it (The Hill)
Twitter Wants to Know Who Leaked Its Source Code on GitHub (Gizmodo)
A TikTok Ban May Be Just the Beginning (The Wall Street Journal)
US moves forward plan to ban TikTok as AOC joins protests supporting app (The Guardian)
China reminds US that it can and will kill a forced TikTok sale (TechCrunch)
Lyft CEO and president stepping down to be replaced by former Amazon exec (TechCrunch)
Micorosoft’s GitHub slashes engineering team in India (TechCrunch)
Australian Funding Rounds
Invest Inya Farmer, a fintech that lets people put their money where their mouths are, plants $1.1 million Seed round (Startup Daily)
Cauldron brews $10.5 million to globalise its precision fermentation platform (Smart Company)
Fintech Lumiant banks $5.26 million in Seed round (Startup Daily)
Mastercard joins CBA backing a Brisbane start-up Paypa Plane (AFR)
International Funding Highlights
Fintech Startup Rain Raises $116 Million To Speed Up Hourly Workers’ Pay Cycles (Forbes)
'Alternative Internet' Builder Tomi Raises $40M to Attract Content Creators (CoinDesk)
Qualtrics accepts $12.5B all-cash acquisition offer to go private (TechCrunch)
CCP Games raises $40M for new triple-A Web3 game in the Eve universe (VentureBeat)
Snap quietly acquired 3D-scanning startup Th3rd last year (TechCrunch)
Character.ai, a 16-Month-Old Chatbot Startup With No Revenue Is Now a $1 Billion Unicorn (The Wall Street Journal)
OP3N raises $28M to build 'WhatsApp meets Amazon' for web3 (TechCrunch)
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