How To Startup Part 4: What Happens To Startups During a Downturn

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.

How To Startup Part 4: What Happens To Startups During a Downturn
Image by SvetaZi/ Shutterstock
According to Layoffs.fyi, over 50 tech startups have made significant layoffs since January 2022. Among them are companies like Netflix, Peloton and Robinhood, which after huge growth during the pandemic now face the harsh realities of rapid inflation, global instability and a terrible startup fundraising environment.

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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:

  1. 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.
  2. 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.
  3. Reduce non-people expenses first. Expenses such as software, real estate, perks, marketing expense or non-necessities.
  4. 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.

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admin@dot.la

🏰 Disney's Epic Investment Stands Out Amidst Gaming Industry Layoffs

Christian Hetrick

Christian Hetrick is dot.LA's Entertainment Tech Reporter. He was formerly a business reporter for the Philadelphia Inquirer and reported on New Jersey politics for the Observer and the Press of Atlantic City.

🔦 Spotlight

In the midst of widespread gaming industry layoffs, a glimmer of positive news emerges as Disney announces a significant move: a $1.5 billion investment in Epic Games. 🏰💰🐭

Image Source: Disney

Disney's $1.5 billion investment in Epic Games, disclosed late Wednesday, signals a strategic alignment aimed at expanding the success of "Fortnite." The deal enhances Epic's growth prospects after financial setbacks, including layoffs, and strengthens the partnership between the two companies. With Disney gaining a larger equity stake in Epic, the collaboration will broaden the integration of beloved Disney franchises like Marvel, Star Wars, Pixar, and Avatar into the game, potentially boosting its appeal and longevity. This significant investment underscores Disney's commitment to interactive entertainment and signifies a shift towards games as a primary revenue stream, aligning with the growing trend of digital engagement among younger demographics. Moreover, the potential for crossover sales of physical Disney products within "Fortnite" and the exploration of new content distribution channels are just some of the opportunities arising from this partnership.

For LA tech, the Disney-Epic Games partnership represents a validation of the region's burgeoning tech and gaming ecosystem. The substantial investment in Epic, who maintains a large Los Angeles office with 1,000+ employees (according to LinkedIn), reflects confidence in the LA’s talent pool and innovation potential. Additionally, this partnership between two industry giants fosters an environment for further collaboration, investment, and growth within LA's tech sector. As Disney and Epic Games deepen their ties and explore new avenues for content integration and distribution, it not only elevates the prominence of LA as a tech hub but also stimulates economic growth and job creation in the region. This partnership highlights LA's unique position as a hub where technology and entertainment converge. With its ability to integrate diverse industries, LA is driving innovation and expansion in digital entertainment. 🚀💸🎮

🤝 Venture Deals

LA Companies

  • ProducePay, a financing and marketplace platform for the fresh produce market, raised a $38M Series D led by Syngenta Group Ventures joined by Commonfund, Highgate Private Equity, G2 Venture Partners, Anterra Capital, Astanor Ventures, Endeavor8, Avenue Venture Opportunities, Avenue Sustainable Solutions, and Red Bear Angels. - learn more
  • Blush, an invite-only dating app that drives users to local businesses on dates, raised a $7M Seed Round from individuals like Naval Ravikant. - learn more
  • Mogul, a startup founded last year that provides an overview of an artist's royalty earnings and identifies areas where money is owed but has not yet been collected, raised a $1.9 million seed round from Wonder Ventures, United Talent Agency, AmplifyLA, and Creator Partners. - learn more
  • Avnos, a hybrid direct air capture startup, raised a $36M Series A led by NextEra Energy and joined by Safran Corporate Ventures, Shell Ventures, Envisioning Partners, and Rusheen Capital Management. - learn more
  • AI.fashion, startup whose mission is to help retailers enhance the online shopping experience by providing consumers with virtual try-ons and personalized fashion recommendations, raised a $3.6M Seed Round led by Neo. - learn more
  • Suma Wealth, startup that aims to demystify financial topics and provide culturally relevant content, virtual experiences, and resources to help Latino users navigate financial challenges and opportunities, raised a $2.2M Seed Round . Radicle Impact led, and was joined by Vamos Ventures, OVO fund and the American Heart Association Impact Fund. - learn more
  • 222, a startup that helps users discover their city and meet new people through unique social experiences, raised a $2.5M Seed Round. Investors included 1517 Fund, General Catalyst, Best Nights VC, Scrum Ventures, and Upfront Ventures. - learn more
  • LimaCharlie, a security operations cloud platform, raised a $10.2M Series A led by Sands Capital. - learn more
  • Polycam, an app that uses a smartphone’s sensors to capture 3D scans of objects, raised an $18M Series A co-led by Left Lane Capital and Adjacent, and joined by Adobe Ventures and individuals like Chad Hurley and Shaun Maguire. -learn more.

LA Venture Funds

Actively Raising

  • ReelCall, Inc., an entertainment technology company focused on powerful apps and platforms that help build and maintain the professional network of connections vital to career growth, is raising a $850K Pre-Seed Round. - learn more
  • CZero, a startup building software to decarbonize logistics for logistics businesses and goods business through a vetted marketplace and optimization software. - learn more
  • Couri, a technology startup addressing last-mile delivery issues, is raising a $450K Pre-Seed Round at a $2.2M post money valuation. - learn more
  • Sweetie, a marketplace to help people plan date nights, is raising a $1.5M Pre Seed Round. - learn more
  • StartupStarter, an investment platform that provides real-time data and analytics on startups, is raising an $850K Angel Round. - learn more

If you’re a founder raising money in Los Angeles, give us a shout, and we’d love to include you in the newsletter!

Venture Waves, Climate Tech Wins, and Silicon Beach's Ongoing Evolution

Christian Hetrick

Christian Hetrick is dot.LA's Entertainment Tech Reporter. He was formerly a business reporter for the Philadelphia Inquirer and reported on New Jersey politics for the Observer and the Press of Atlantic City.

Anduril Seeks $1.5B in VC Funds

Defense company Anduril Industries Inc., based in Costa Mesa and founded by Palmer Luckey, is seeking to raise $1.5 billion in fresh funds to boost its valuation to $12.5 billion or more, according to sources quoted by The Information. This fundraising effort, if successful, would mark one of the largest venture capital rounds of the year.

Image Source: Anduril

Anduril recently secured a contract to develop and test small unmanned fighter jet prototypes under the Air Force’s Collaborative Combat Aircraft (CCA) program, beating out major defense companies like Boeing, Lockheed Martin, and Northrop Grumman. Alongside General Atomics, Anduril will design, manufacture, and test these aircraft, with a final multibillion-dollar production decision expected in fiscal year 2026. This program aims to deliver at least 1,000 combat aircraft to fly in concert with manned platforms and is part of the Air Force’s Next Generation Air Dominance initiative. Central to Anduril’s success in this contract is the Fury autonomous air vehicle, acquired through the purchase of Blue Force Technologies. This victory underscores Anduril's rapid advancement in the defense sector, aligning with Luckey's vision of building faster and more cost-effective defense assets. - learn more

Los Angeles Ranks Number 1 in Emerging Climate Tech Hub

The 2024 Emerging Climate Tech Hubs Report by Revolution highlights Los Angeles as a burgeoning center for climate tech innovation. LA's growth in this sector is driven by its diverse talent pool, strong research institutions, and a culture of environmental consciousness. The city's unique mix of legacy industries, such as entertainment and aerospace, alongside emerging tech companies, positions it as a pivotal player in the climate tech landscape. This shift reflects a broader trend of decentralized climate tech funding across the U.S., reducing the historical dominance of California's traditional hubs. - learn more

Silicon Beach: Looking Back, Moving Forward

Assessing the overall health of the startup market is challenging, especially as venture capital funding has decreased by an average of 61% from 2021 to 2023 across the top VC markets in the US. Markets with robust ecosystems in AI, SaaS, Biotech, Healthtech, and Fintech appear to be weathering the downturn better than those focused on Consumer and Gaming industries, areas where Los Angeles traditionally excels.

Percent Change In VC Funding By Region

CB Insights

LA Times paints a rather bleak outlook on the Los Angeles tech scene noting venture capital funding in Greater Los Angeles plummeted 73% from 2021 to 2022. Silicon Beach, once a vibrant tech corridor, currently faces high vacancy rates and lacks late-stage financiers, especially in the AI sector. However, there are positive signs, including growth in aerospace startups and increased venture capital investment in early 2024, suggesting a potential rebound for LA's tech ecosystem.

While LA may not be exceeding expectations during this period, its tech ecosystem warrants a nuanced evaluation, given the broader market dynamics and its strong performance in specific sectors. Reach out to us with your thoughts.

🚀 SpaceX gears up for another stellar year, active raises, and more

Christian Hetrick

Christian Hetrick is dot.LA's Entertainment Tech Reporter. He was formerly a business reporter for the Philadelphia Inquirer and reported on New Jersey politics for the Observer and the Press of Atlantic City.

Happy Friday Los Angeles! You made it through the first week of 2024!

🔦 Spotlight

Elon Musk may be a divisive (albeit entertaining) figure, but the continued success of SpaceX is pivotal for the aerospace industry in Los Angeles and more broadly around the world.

Image Source: SpaceX webcast

What happened with SpaceX in 2023?

  • Elon Musk challenged Facebook founder, Mark Zuckerberg to a cage fight.
  • SpaceX launched 96 successful missions with its Falcon series of rockets, a 57% increase over its previous annual record.
  • SpaceX conducted two test flights of the largest and most powerful rocket ever built, Starship.
  • Roughly two-thirds of SpaceX's launches in 2023 were devoted to building out Starlink, the company's satellite-internet megaconstellation.
  • Isaacson’s Elon Musk biography was published in September including everything from Musk’s tumultuous relationship with his father to his work ethic and “demon mode”.

Moving forward what can we expect from SpaceX and its controversial founder? Continued innovation pushing the aerospace industry to new limits? Yes. More drama? Without a doubt.

Here is some of what is to come in 2024:

🤝 Venture Deals

Just Announced

Check back next week!

LA Exits

  • CG Oncology, an Irvine, CA-based developer of immunotherapies for bladder cancer, filed for a $100M IPO. It plans to list on the Nasdaq (CGON) with Morgan Stanley as left lead underwriter, and has raised around $317m in VC funding. - learn more
  • McNally Capital agreed to sell Advanced Micro Instruments, a Costa Mesa, CA-based maker of gas analyzers and sensing technologies, to Enpro (NYSE: NPO). - learn more

Actively Raising

  • ReelCall, Inc., an entertainment technology company focused on powerful apps and platforms that help build and maintain the professional network of connections vital to career growth, is raising a $850K Pre-Seed Round. - learn more
  • CZero, a hard-tech startup that is developing a technology for decarbonizing natural gas, is raising a $1.5M Seed Round. - learn more
  • Couri, a technology startup addressing last-mile delivery issues, is raising a $450K Pre-Seed Round at a $2.2M post money valuation. - learn more
  • Sweetie, a marketplace to help people plan date nights, is raising a $250K Angel Round. - learn more
  • StartupStarter, an investment platform that provides real-time data and analytics on startups, is raising an $850K Angel Round. - learn more

If you’re a founder raising money in Los Angeles, give us a shout, and we’d love to include you in the newsletter!

📅 LA Tech Calendar

Sunday, January 7th

Wednesday, January 10th

  • Startup Cafe: Networking with a Kick - Entrepreneurs, Startups, and Tech Enthusiasts join together to meet and connect with like-minded people, industry professionals and investors, while enjoying a nice cup of coffee in Venice at The KINN. This week’s interactive discussion about AI’s evolution in entertainment will feature Dr. Sam Khoze and Rachel Joy Victor.
  • Venice Tech Happy Hour- Join Startup Coil and FoundrHaus Wednesday evening and enjoy the sunset from the rooftop, grab a bite overlooking Abbot Kinney, and mingle with other tech enthusiasts and entrepreneurs by the bar on the patio.

Have an awesome event coming up? Reach out to be featured on next week’s Newsletter!

📙 What We’re Reading

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