
Get in the KNOW
on LA Startups & Tech
X
How To Startup Part 4: What Happens To Startups During a Downturn
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.
While I was initially going to write Part 4 about MVP (minimum viable product), the topic of how to survive an economic downturn seems more relevant as it appears we may be on the cusp of a recession. A big question many people are asking right now is…
Why Is This Happening?
The main reason this downturn is happening is due to inflation. As interest rates have sat at zero or essentially negative since the beginning of COVID-19, asset and labor prices have gone up and everything costs more. The Fed is now raising these rates to combat inflation. When interest rates rise, it clobbers stock prices - specifically for high-growth companies whose earnings are mostly in the future.
To further understand this, you must understand how investors value companies. Analysts apply a discount rate to the future earnings of a business to value a company. To discount stock values, analysts project what future revenues and future profits will look like for businesses, and then discount the value of those back to what they are worth in the current day. So as interest rates rise, analysts increase the rate at which they discount future earnings. For example, what previously was $100 worth of earnings in five years, may now actually be only $50 worth of earnings in five years. Therefore, the value of the company, or its market capitalization, declines.
How Does This Affect Startups?
When public companies, particularly tech companies, are growing very quickly, their valuation gets slammed when interest rates rise. When valuations go down, it can affect startups, valuations and fundraising in several ways:
- Businesses are compared to similar public companies. For example, proptech startups will be compared (“comped”) to public real estate and tech companies like Zillow, Redfin, Compass and Offerpad because they are the closest in comparison. If Zillow is now only worth ⅓ of what it used to be worth, then venture capitalists will base their valuations of startups at a significantly lower rate than when the company was valued higher.
- VCs have less money to invest in private companies. Although many venture funds have “dry powder,” they undoubtedly will have fewer exits and fewer markups in 2022 than in past years. This means they will have less recycled capital available to reinvest, and they will have a harder time raising more money from their Limited Partner investors.
- Crossover investors have plenty of public options. Much of the froth in the funding environment of the last few years was driven by crossover investors – firms which make both public and private investments. Specifically, many hedge funds and even mutual funds invested in private companies in the Series C, D and E stages. But now, with the stock market down so much, those crossover investors are not doing private investing and they have returned to their focus on public stocks where there are many great investing opportunities given the recent downturn.
- VCs will support their existing portfolio companies ahead of making new investments. VCs are being asked by their portfolio companies right now to invest in rounds that will help them extend their runway, so VCs have less capital available for new deals.
- Everyone is in a bad mood. Yes, that’s a thing. Everyone is in a bad mood because they have lost a lot of money in the last few months, and that makes people sour and skeptical.
- The FOMO is gone. So much of the exuberance in venture capital the last few years was driven by investors’ fear of missing out (FOMO). We now face the opposite situation, where investors feel no compelling reason to stick their neck out and invest aggressively when their competitor firms are mostly in hiding.
What Should Startups Be Doing?
While downturns are not all bad news, you’ll want to do everything in your power to keep the momentum going. Remembering that eventually this too shall pass, here are some tips on how to survive and thrive as a startup:
- Reduce your burn. Startups in this type of chilly funding environment should aim to have at least 12 months and ideally 24 months of runway. If you want help figuring out how long your runway is, check out this Forbes guide to calculating and managing monthly burn.
- Use conservative math. Assume revenue is likely lower than what it was in your previous plan. If you are thinking about reducing your burn, you also need to keep in mind that the revenue side of the equation is also likely to come down. In turn, your cost side may need to come down more than what you initially planned for.
- Reduce non-people expenses first. Expenses such as software, real estate, perks, marketing expense or non-necessities.
- Reduce headcount once. Drawing out multiple rounds of layoffs is bad for company morale and can leave employees anxious or angry. If you have to make cuts, use this as a time to get rid of low performers if possible. While it’s an unfortunate and difficult thing to do, remember to lay off with compassion.
If you’re less of a reader and more of a video-watcher, Craft Ventures did a great video on how to operate during a downturn that covers these topics and more. NFX also has an extensive guide to thriving in a 2022 downturn and YC advises founders to plan for the worst. Sequoia shared this deck with its founders describing what to do and why we’re here, and Uber CEO Dara Khosrowshahi sent a memo to his team describing how the company is navigating the current market. Many other VC perspectives are available on Twitter.
If there is anything we can learn from the pandemic, it’s that challenges create opportunity and we are more adaptable than we think. Downturns can be scary and stressful, but if you plan well and welcome change, great companies can thrive during these times too.
- Is Venture Capital Due for a Slowdown? - dot.LA ›
- Global Venture Funding Dipped $10 Billion in February - dot.LA ›
- Venture Slowdown? New Data Shows Dip in Global Funding in 2022 ›
- How and Why To Build An MVP - dot.LA ›
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.
Subscribe to our newsletter to catch every headline.
Regard Raises $15M for AI-Powered Software That Help Doctors Diagnose Patients
Decerry Donato is dot.LA's Editorial Fellow. Prior to that, she was an editorial intern at the company. Decerry received her bachelor's degree in literary journalism from the University of California, Irvine. She continues to write stories to inform the community about issues or events that take place in the L.A. area. On the weekends, she can be found hiking in the Angeles National forest or sifting through racks at your local thrift store.
Culver City-based health care startup Regard, which uses AI-driven software to help physicians accurately diagnose patients, has raised $15.3 million in Series A funding.
Pasadena-based Calibrate Ventures and Colorado-based Foundry Group led the investment in Regard, formerly known as HealthTensor. Other investors that participated in the round include TenOneTen Ventures, Susa Ventures, Brook Byers of Byers Capital and Dropbox CEO Drew Houston. The new funding will be used to grow Regard’s team and customer base, the company said in a press release.
At a time when the clinical health care workforce is suffering from burnout and attrition in the wake of the pandemic, Regard’s technology looks to alleviate some of the pressure on health care workers. The startup’s AI-enabled software is integrated directly into a provider’s system and uses an algorithm to analyze patients’ medical records, allowing physicians to more easily diagnose them.
Since launching its flagship product in 2020, Regard’s technology has been used on more than 30,000 patients, according to the company. The startup charges health care providers around $500 to $700 per month for access, co-founder and CEO Eli Ben-Joseph told dot.LA, with its customers including Torrance Memorial Medical Center, Cedars-Sinai Medical Center and roughly a dozen other hospitals across the U.S.
“We’re building something that’s a game-changer for doctors,” Ben-Joseph said. “It’s helping them catch medical conditions that they would have missed. So regardless of market conditions, we’re able to have value and I think investors saw that and got excited.”
Co-founders from left to right: CEO Eli Ben-Joseph, CTO Thomas Moulia, and COO Nate Wilson. Courtesy of Regard
Founded by pre-med students Ben-Joseph, Nate Wilson and Thomas Moulia in 2017, Regard got its start through Cedars Sinai’s Techstars-backed accelerator program. It was at the accelerator program that Ben-Joseph observed physicians’ workflows and saw the need for a product like Regard’s; he recalled noticing how doctors would constantly pop in and out of a patient’s room, shuttling between the patient and a computer where they could enter data and notes.
“I think that’s why so many doctors are burning out now, as they just don’t have software that really enables them,” Joseph said.
Ben-Joseph—who coupled a bachelor’s degree in bioengineering from MIT with a master’s in computer science from Stanford—noted that Regard’s technology can automatically detect up to 50 of the most common medical conditions, including heart failure, diabetes, obesity, depression and anxiety.
“We have a 90% accuracy rate at the minimum,” he said. “Physicians will look at our software and accept it, but it’s not perfect. We tell physicians to treat it like the relationship [with a] medical student.”
Decerry Donato is dot.LA's Editorial Fellow. Prior to that, she was an editorial intern at the company. Decerry received her bachelor's degree in literary journalism from the University of California, Irvine. She continues to write stories to inform the community about issues or events that take place in the L.A. area. On the weekends, she can be found hiking in the Angeles National forest or sifting through racks at your local thrift store.
This Week in 'Raises': Regard Secures $15M, MaC Venture Capital Raises $203M for Second Fund
Decerry Donato is dot.LA's Editorial Fellow. Prior to that, she was an editorial intern at the company. Decerry received her bachelor's degree in literary journalism from the University of California, Irvine. She continues to write stories to inform the community about issues or events that take place in the L.A. area. On the weekends, she can be found hiking in the Angeles National forest or sifting through racks at your local thrift store.
This week in “Raises”: A local healthcare startup secured funding to help grow the team and deploy its software to more physicians and hospitals, while Black-led, seed-stage venture capital firm surpassed its goal for its second fund.
Venture Capital
Regard, a Culver City-based healthcare startup using AI software to help physicians diagnose patients, raised a $15.3 million Series A funding round co-led by Calibrate Ventures and Foundry Group.
Homelister, the Santa Monica-based digital brokerage and real estate startup, raised a $10M Series A funding round co-led by M13 and Homebrew.
L.A.-based cybersecurity firm Inspectiv raised an $8.6 million Series A funding round led by StepStone Group.
Foresite Technology Solutions, a Costa Mesa-based technology platform that offers IP management to the construction industry, raised $8 million in funding led by Gallant Capital.
L.A.-based virtual dressing room StyleScan, which uses AI and augmented reality for its virtual dressing room fashion SaaS, raised $1 million in new funding led by Clearbrook Capital.
Santa Ana-based online health care provider platform Sensible Care, raised a $13 million Series A funding round led by Volition Capital.
Funds
MaC Venture Capital, an L.A.-based, Black-led, seed-stage venture capital firm, raised $203 million for its second fund from repeat investors like Goldman Sachs, ICG Advisors, StepStone, the University of Michigan, the George Kaiser Family Foundation and the MacArthur Foundation.
Raises is dot.LA’s weekly feature highlighting venture capital funding news across Southern California’s tech and startup ecosystem. Please send fundraising news to Decerry Donato (decerrydonato@dot.la).
Decerry Donato is dot.LA's Editorial Fellow. Prior to that, she was an editorial intern at the company. Decerry received her bachelor's degree in literary journalism from the University of California, Irvine. She continues to write stories to inform the community about issues or events that take place in the L.A. area. On the weekends, she can be found hiking in the Angeles National forest or sifting through racks at your local thrift store.
How Braid Theory Plans to Build the Blue Economy from the Port of LA
Keerthi Vedantam is a bioscience reporter at dot.LA. She cut her teeth covering everything from cloud computing to 5G in San Francisco and Seattle. Before she covered tech, Keerthi reported on tribal lands and congressional policy in Washington, D.C. Connect with her on Twitter, Clubhouse (@keerthivedantam) or Signal at 408-470-0776.
San Pedro-based Braid Theory is one of the growing number of accelerators in the country looking to grow the so-called blue economy, which spans a range of ocean-related industries and is estimated at $2.5 trillion a year.
The accelerator is accepting online applications until July 18, with its second-ever program kicking off in August.
This year’s focus will be different from the typical accelerator: Startups in this group will test their products directly with companies active in the ocean economy for four months, collecting data on what works, what doesn’t and further developing proof of concept. Braid Theory will help these startups come up with their business plan and pitches, and connect them to investors and potential partners in the field. In return, it takes an equity warrant that can be converted after three years.
The startups joining Braid Theory typically span industries like port logistics, aquaculture and energy, all of them aiming to test their technologies and untapped opportunities of the burgeoning industry. The accelerator’s goal is to bring those companies from pre-revenue into commercialization.
And all of them are looking to solve challenges within the blue economy ecosystem, many of which have also been exacerbated by the COVID-19 pandemic. With 31% of all goods floating across the ocean to and from the U.S. pass through the Port of L.A. and the Port of Long Beach, COVID-19 strangled supply chains and increased the volume of goods handled at L.A. 's premiere dock by nearly 16% between 2020 and 2021. This created numerous logistical challenges for the dwindling workforce at the nation’s busiest ports while increasing emissions.
“The thing that we're trying to think about are ways in which we can leverage biological systems and software to make more immediate changes in markets that have a low barrier to entry,” Braid Theory co-founder Jim Cooper said of accelerator’s approach to addressing a wide range of climate and logistical issues.
Cooper founded Braid Theory with his colleague Ann Carpenter after the pair left PortTechLA, a maritime and logistics incubator that shuttered in 2016. The two wanted to create an accelerator for port and ocean startups that went beyond logistics and took into account other promising sectors of the ocean economy, including sustainable fish and plant cultivation as well as tools to make the shipping sector more efficient.
Jim Cooper co-founded Braid Theory with his former colleague from PortTechLA, Ann Carpenter.Image courtesy of Braid Theory
Accelerators like Braid Theory are attempting to fill a void in the blue economy ecosystem. Despite being home to several universities with robust maritime research centers and a giant port infrastructure that could be better optimized, few startups survive in Los Angeles due to a lack of early stage funding, according to a 2020 report from the Los Angeles Economic Development Corporation. The accelerator provides funds and lab space and investor connections to nascent startups tackling a wide range of ocean-related problems.
The same report found that ocean startups, particularly early-stage ones, have a difficult time getting funding to accommodate the need for expensive lab equipment like centrifuges, chillers and pipettes. Startups in the blue economy space are primarily funded through federal and state dollars, NGOs and philanthropies, and competitions. But while angel funding has historically been slow to trickle into blue economy startups, some are starting to take note of the size of the market. In the first cohort, eight out of 12 startups received federal funding and investor funding with the help of Braid Theory.
The accelerator’s first graduating class included Florida-based Tampa DeepSea Xplorers, which makes seafaring autonomous vehicles that can scrape the bottom of the ocean and collect data faster for researchers to use as they study climate change impact or source for different medicines. Irvine-based ReCreate Energy is another graduate, which sources algae to create a more sustainable bio-crude oil that can be used at gas and oil refineries. While FlashQ, a Canada-based AI platform, is trying to reduce truck congestion and the emissions caused by them at the port by creating a scheduling platform that optimizes waiting and shipment times.
“The key is the opportunity, the opportunity was there,” Mimi Carter, a biotech investor with the Pasadena Angels, said of the business opportunities in the ocean market. “We saw a market that was unaddressed and is still an emerging market.”
A cluster of cranes at the Port of Long Beach.Photo by DJANA 575/ Shutterstock
To Carter’s credit, L.A. County boasts 75 miles of coastline that the LAEDC expects by 2023 will produce more than $80 billion in regional output, make roughly $50 billion in gross county product, and create over 200,000 direct and indirect jobs, according to a 2020 report. And, according to the Los Angeles Economic Development Corporation, economic and job growth in this sector relies heavily on the creation and implementation of new technologies, making angel investors necessary players in bolstering the ocean economy.
“Not only do we want to be investing in a sustainable product, but someone we count as a first mover,” Carter said of her investment approach. Already, groups like the Pasadena Angels and Techstars L.A. have made investments in the space. Reece Pacheco, a blue economy angel investor, is quietly working on a new venture fund around the blue tech space that hasn’t been announced yet.
“What we're starting to see is there are entrepreneurs who are either coming up through these research firms, or there are entrepreneurs who have cut their teeth elsewhere but care about the ocean,” Pacheco said.
There’s also Braid Theory’s neighbor (and landlord), AltaSea, the nonprofit research hub that has facilitated a number of partnerships with companies across the world.
“We do want to become the leading destination for the blue economy in terms of technology, finance, the education pathways it takes for students to get into these jobs in the future, and then the actual workforce development for the jobs of the future,” said Terry Tamminen, the new CEO of AltaSea.
Braid Theory’s makeshift shipping container-turned-lab is next door to a slew of other startups and projects in the blue economy space. USC researchers are incubating bubbling cauldrons of kelp that could create biofuels and alternative food sources. While Oceanographer Robert Ballard, who found the Titanic wreckage in 1985, set up a sea exploration program a few doors down.
“The ocean is more than a destination for tourists and a place for Jacques Cousteau and David Attenborough to go diving,” Tamminen said. “It's actually something right at our doorstep that we need to protect for our own survival, but it’s also an economic opportunity.”
- Long Beach is Becoming Home to the Aerospace Industry Once ... ›
- Electrify America Invests $200M in Southern California - dot.LA ›
- Xos Trucks Unveils New Electric Semi and Delivery Trucks - dot.LA ›
- Inside the Port of LA's 'Aggressive' Zero-Emission Plan - dot.LA ›
Keerthi Vedantam is a bioscience reporter at dot.LA. She cut her teeth covering everything from cloud computing to 5G in San Francisco and Seattle. Before she covered tech, Keerthi reported on tribal lands and congressional policy in Washington, D.C. Connect with her on Twitter, Clubhouse (@keerthivedantam) or Signal at 408-470-0776.