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Prediction: LA's Startup Shakeout Will Continue Into 2023, Setting Survivors Up for Long-Term Success
Spencer Rascoff
Spencer Rascoff serves as executive chairman of dot.LA. He is an entrepreneur and company leader who co-founded Zillow, Hotwire, dot.LA, Pacaso and Supernova, and who served as Zillow's CEO for a decade. During Spencer's time as CEO, Zillow won dozens of "best places to work" awards as it grew to over 4,500 employees, $3 billion in revenue, and $10 billion in market capitalization. Prior to Zillow, Spencer co-founded and was VP Corporate Development of Hotwire, which was sold to Expedia for $685 million in 2003. Through his startup studio and venture capital firm, 75 & Sunny, Spencer is an active angel investor in over 100 companies and is incubating several more.
For years, the VC funding environment in Los Angeles and beyond has defied the laws of gravity. When it came to tech expansion, the unofficial ethos seemed to be: what goes up must stay up. But recent forces have conspired to paint a much different picture than we’re used to seeing, and the effects are being felt at every stage of the startup ecosystem.
My prediction: while the future funding forecast looks bleak and will stay that way for a while, it’s not without its bright spots, especially for those who are in it for the long run.
The Fed Effect
Here’s where it started: In the public equity markets, the tide began to turn as the Fed started raising interest rates in order to tame inflation. This jumpstarted a risk-off mentality, which happens when there’s increased uncertainty, even pessimism, about the economic outlook. Higher discount rates due to higher interest rates lead to growth stocks trading down.
It’s been a dazzling display of volatility. Market-wide, we’ve seen high-growth tech stocks decline significantly in the past six months— many tech stocks are down 50%-plus in the last year. 2022 was rough.
On the extreme end, Carvana shares have dropped 97%. Shopify stock is down 80% in 2022 and even Amazon, which to-date has seemed relatively bulletproof, lost more than 40% of its value since January 1. These are good examples of not only the problem at hand, but also the opportunity.
Crossover investors—those who do both public and private market investing—suddenly see public market opportunities again. They can now buy high-quality liquid assets in public markets at historically low multiples.
That’s the exact opposite of a few years ago when public equities were valued very highly. Then, crossover investors simply couldn’t find great returns in public markets, and chose instead to fish upstream into the private market investing tide pool to find viable prospects. That helped fuel the expansive L.A. (and elsewhere) startup success we’ve known to-date.
Stock-Induced Gridlock
Now that crossover investors have returned more to the public markets (or have stayed on the sidelines), and more traditional growth investors see a more difficult path for their companies to IPO, the local venture landscape has changed. Late-stage funding opportunities and the IPO markets have essentially shut down. Most companies that raised money at high valuations can’t go back because they can’t command such a high price in the public markets.
A year or two ago, it was typical to see a $5 million seed round at a $25 million valuation. Today, that’s an incredibly difficult hurdle to jump. I see numbers closer to $2 to $3 million at $10 to $15 million valuations, and even that feels like a significant success.
This is where the gridlock begins. This scenario forces late-stage private companies into a pretty undesirable corner. They essentially have two options: A) raise a flat or down round or B) cut expenses and extend runway. While neither are ideal, most companies who can are choosing the lesser of two business evils: option B.
This means that the majority of growth-stage companies raising now are only doing so because they’ve run out of cash and will shut down without additional funding. This reinforces the prevalence of down rounds in the market.
And at the end of the line? IPOs, the final step, simply aren't happening right now. It’s gridlock from start to finish.
Ripples, Then Rebound
One of the biggest implications of these market shifts is that not only do companies have less capital, but also less access to future capital. These days, cutting costs is tantamount to survival, and though necessary, it’s having a ripple effect throughout the tech industry. Hiring has slowed. Marketing expenditure has decreased. Expenditures overall are down. On top of these startup trends, consider the major layoffs happening at Meta, Snapchat and other large- and small-scale players, and it’s hard to see anything but a grim outlook ahead.
But my perspective: the long view isn’t all bad. Because companies are taking this chance to focus on unit profitability and sustainable growth, they’re setting themselves up for future success.
The L.A. market is particularly poised to weather this storm, in large part because it’s a hub for sectors that are standing strong mid-downturn.
Clean tech, a catchall name for everything from green energy to sustainable building materials to electric cars, is booming, and L.A. is benefiting. One of the pioneers of the space, Rivian, is based just outside L.A. in Irvine, and companies like Universal Hydrogen, Loop and EVGo are all based in the area.
The defense tech and aerospace industries are also on the uptick, and L.A. is home to some of the most innovative startups in those verticals. Take for instance Apex Space, a Culver City-based startup dedicated to producing better spacecraft at scale, and Relativity Space, which is building the first autonomous rocket factory and launch services for satellites. One of the largest venture rounds of the year was just announced for Anduril, a tech-enabled defense contractor based in Costa Mesa. SpaceX, one of the most highly valued private companies, is based in Hawthorne and continues to thrive. (Disclosure: my venture fund, 75 & Sunny Ventures, is an investor in Apex, Relativity and SpaceX.)
Mega rounds for powerhouse companies like Anduril and SpaceX during this down market have meant that, in contrast to most of the country, late-stage funding in L.A. has actually increased relative to early-stage funding. Still, early-stage startups in L.A. continue to thrive. In terms of deal count, seed and early-stage investments make up 75% of L.A.’s venture rounds, driving the flywheel that has made L.A. tech so dynamic over the past few years.
If you hated the last few months, as I have, remember that this too shall pass. The Fed will slow and eventually halt rate rises, and I’d bet the halt will be followed by rate declines (in late 2023?). My prediction: by late 2023 or 2024, the funding market will improve and the weather will turn. Maybe we won’t get completely back to “75 and Sunny” for a while, but the gruesome second half of 2022, which will continue in 2023, will subside late next year. 2023 will be a lost year, a year in which startups should focus on surviving not thriving. Those that make it to the other side of this downturn, like those which survived the 2008 and 2000 downturns, will become long-term winners and be stronger for having weathered this storm.
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Spencer Rascoff
Spencer Rascoff serves as executive chairman of dot.LA. He is an entrepreneur and company leader who co-founded Zillow, Hotwire, dot.LA, Pacaso and Supernova, and who served as Zillow's CEO for a decade. During Spencer's time as CEO, Zillow won dozens of "best places to work" awards as it grew to over 4,500 employees, $3 billion in revenue, and $10 billion in market capitalization. Prior to Zillow, Spencer co-founded and was VP Corporate Development of Hotwire, which was sold to Expedia for $685 million in 2003. Through his startup studio and venture capital firm, 75 & Sunny, Spencer is an active angel investor in over 100 companies and is incubating several more.
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https://www.linkedin.com/in/spencerrascoff/
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Vinfast's First EVs Have Just 180 Miles of Range but Still Cost Over $55K
05:15 AM | December 13, 2022
Vinfast
Vinfast, the Vietnamese EV company with headquarters in Los Angeles, shipped its first order of vehicles to U.S. soil from Hai Phong, Vietnam on November 25th. The batch of 999 automobiles is due to arrive here in California on Thursday this week.
The VF8 SUVs on board will have the difficult task of convincing American buyers that an unknown, untested Vietnamese manufacturer can deliver on a new technology. And so far, the company appears to be off to a rocky start.
According to an email sent to reservation holders on November 29th, the VF8s in the initial shipment will be a special “City Edition” and have lower range advertised than the previously announced versions–just 180 miles in total. Over the weekend, Vinfast confirmed to dot.LA via Twitter that all of the vehicles in the first batch are the City Edition, and that the standard edition would be coming Q1 of 2023. Until this email, there had been little, if any mention of this new City Edition. The message to reservation holders offered no rationale as to why the company was choosing to ship this version of the car instead of the 260-292 mile-range VF8 it’s been advertising for months. Despite the lower range, however, the EVs will still carry a price tag of either $55,500 or $62,500, depending on trim–just $3,000 less than the previously-announced versions.
The VF8 Specs page from Vinfast’s site still bears no mention of a “City Edition,” but that’s what’s coming to America this month.
Vinfast is offering reservation holders an additional $3,000 off these City Edition variants (bringing the total to $6,000 less than the previously announced versions). But even at a discount, the vehicle’s $52,000 price tag is far from competitive with more established EV makers and raises questions about the brand’s strategy and value.
For comparison:
- The 2023 Hyundai Ioniq 5 has 220 miles of range and starts at $42,745. Or 303 miles of range for $60,000.
- The base model Kia EV6 costs $49,795 and goes 206 miles on a full charge.
- The Mustang Mach E starts at 46,895 and reaches 224 miles.
And the list goes on. In fact, you’d be hard pressed to find a 2023 EV with a worse cost to range ratio than the VF8. Vinfast, which has been nearly impossible to reach on this matter despite numerous calls and emails, hasn’t explained why they chose to offer such a range-compromised version as their initial foray into the U.S. market, or why the cost remains so high.
The reaction to the news, especially on Reddit, has been largely negative, with users accusing the company of “springing” the City Edition on reservation holders. Others speculated that the company rushed out the first batch so it could drum up good press before its recently announced IPO. Whatever the reason, most redditors didn’t seem to be buying it, and with Vinfast so reluctant to comment, it’s hard to see the announcement in a light that bodes well for the company’s future. First impressions tend to last, and this doesn’t seem like a good one for the EV hopeful.
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David Shultz
David Shultz reports on clean technology and electric vehicles, among other industries, for dot.LA. His writing has appeared in The Atlantic, Outside, Nautilus and many other publications.
These 2 Los Angeles Startups Are on the Forefront of a New Space Health Care System
06:00 AM | January 01, 2023
As human space tourism ramps up, and we continue to explore deeper into the cosmos, one alarming fact is becoming more evident: Despite decades of human spaceflight, we still have very limited information about how going to space, or staying there for sustained periods of time, affects our bodies.
So far, flights to low Earth orbit are relatively stable, and thankfully no one has perished on a trip yet. But there’s also more to come; Virgin Galactic is planning more space tourism trips next year and beyond that, longer-term missions like Elon Musk’s pet project to colonize Mars could come with some serious health risks. And, like any mission to space, nearly every variable has to be considered before launch to ensure the people undertaking these journeys are as healthy as possible.
That’s where private industry comes in. There’s a handful of startups that are focused on developing technology to make it easier to monitor human health in space. And while it may seem like a far-away pipe dream, they’ll be the first to tell you that having startups begin to develop health care products for space-related exploration is key to ensuring there aren’t mass casualties.
“The truth is, there is little that is more complex than space, and biology, and these are not things that have fast development times,” said Elizabeth Reynolds, a biologist and director of the Starburst Aerospace Care in Space Challenge. The challenge recently awarded six winning startups (three were local to Southern California) a $100,000 investment from pharmaceutical company Boryung, support for on-orbit experimentation by Axiom, a Houston-based company making private space stations, and acceptance into Starburst’s 13-week accelerator program.
“As we talk about deep space exploration, that is a point where we get into high amounts of cosmic radiation and it's an environment that will kill us,” Reynolds said. “We need solutions that are completely untethered from Earth.” Reynolds said she was “less concerned” about space tourism, and more focused on long-term habitation.
Reynolds did note that there’s one easy option, one that NASA’s relied on heavily up until now: send robots into space to do human work. That’s possible, but she noted, “I cannot imagine a future where we continue to only explore space by robots.”
There’s a myriad of issues that people face when spending long durations of time in space. Some side effects can range from motion sickness to radiation poisoning to heart and muscle atrophy. Others include bodily fluid shifting due to zero gravity, changes in vision, loss of muscle strength and changes in gut biome behavior. Of course, there’s also a host of potential mental side effects too, including depression or anxiety. A 2021 study published in the Journal of Clinical Nursing noted that these effects can also persist even after a person comes back from orbit.
Kay Olmstead, CEO of San Diego-based NanoPharma Solutions, was one of the companies selected by Starburst. She told dot.LA the company is working on a way to deliver drugs to people in space to maximize their effects.
Olmstead told dot.LA., NanoPharma “uses [a] nanocoating method developed by NASA to nanosize drugs to improve biosorption – [the] smaller the particle size, better solubility of [the] drug, hence better absorption into our body which is mostly water.”
The importance of nano-soluble drugs is key, since it could limit side effects that come from typical ingestion of drugs, such as liver and kidney damage, or systemic toxicology (when a drug is absorbed by or distributed to other parts of the body besides the specific target area), Olmstead explained.
She added that NanoPharma is working on using vacuum pressure in low Earth orbit to deliver drugs to diseased organs without needles, a potential groundbreaking solution since right now, most life-saving drugs need to be administered via IV and that’s “not suitable for space travelers.” Instead, NanoPharma is working to patent several methods of drug delivery including a nano-nasal spray and a nano-inhaler.
Olmstead noted that there’s a number of companies working on private space stations – besides Axiom, she also cited Northrop Grumman, Nanoracks and Sierra Space, who all have “grand plans of infrastructure building in space for private space travelers and in-space manufacturing.”
There’s a couple dueling local companies with ambitions to build private space stations as well: Vast Space, and Orbital Assembly.
Olmstead noted that there will have to be construction workers in space overseeing building of these outposts, and added, “Care for these space travelers and workers is the most important concern of these aerospace companies aside from the station building/maintenance.” She also said that outposts on the moon, which will likely be built after stations in low Earth orbit, come with “even more severe health hazards.”
Another local startup that won the Starburst challenge was Vibo Health. Based in Los Angeles and led by physicist and CEO Gil Travish, Vibo develops wearable health tracking technology that uses wrist scanning to give users insight into their health, with the goal of finding health risks without invasive tests.
Right now, Vibo has a growing business terrestrially, but Travish told dot.LA he’s eager to see how the tech could be applied to astronauts. “It is a niche, of course, but it's a growing niche,” Travish said. He noted that Vibo hopes to do in-space testing within the next two years.
For now, though, both Vibo and NanoPharma said they will continue developing and testing their technology on the ground with the goal of bettering patients’ lives here on earth. Travish said he’s optimistic that the work will not only better conditions for space-faring humans, but also unlock information about the human condition.
“It’s not just about going to space, it’s about learning more about ourselves,” Travish said.
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Samson Amore
Samson Amore is a reporter for dot.LA. He holds a degree in journalism from Emerson College and previously covered technology and entertainment for TheWrap and reported on the SoCal startup scene for the Los Angeles Business Journal. Send tips or pitches to samsonamore@dot.la and find him on Twitter @Samsonamore.
https://twitter.com/samsonamore
samsonamore@dot.la
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