Tech startups fearing anticipated instability are scrambling to conserve an age-old commodity — cash — the New York Times (NYT) reported on Sunday (Nov. 17).
Following quick growth and easy funding, startups are starting to jump off the fast lane and follow a more conservative road map.
San Francisco firm Kruze Consulting said young companies are raising more while spending less and hoarding cash in the name of longevity. Chief operating officer (COO) Scott Orn told the NYT that “people are locking down that last dollar.”
Kruze’s clients kept a cash-on-hand average of $3.5 million from January to March 2019; by September, they upped that amount to $4.5 million, he said. Those startups also reduced average spending by $30,000 a month, going from $260,000 to $230,000, he said.
Rather than throwing money at fast growth, startup firms are heeding investors’ calls to make a profit.
Silicon Valley investor Joe Horowitz with Icon Ventures said companies are raising “interim” funding for protection in case 2020 proves difficult. He pointed to two companies in one day doing just that and said those were judicious steps.
“We do advise companies to be more cautious on spending, move up fundraising plans and raise a bit of extra capital if they can, particularly as we look at these headwinds,” he said.
Octane AI, a Silicon Valley customer service software startup, said investors are asking when the company will break even and how much has been spent, president and co-founder Ben Parr told the NYT.
“A year ago, they’d ask, ‘What’s your month-over-month growth rate?’” Parr said.
Venture capital firm Founder Collective said there is more to fear than there was in other years when slowdowns were anticipated, said investor Micah Rosenbloom.
“Most folks under 30 haven’t known anything but a growing market, so most people in the ecosystem aren’t as worried as they should be,” he said.
Startup scrutiny follows WeWork’s initial public offering debacle, with investors asking tech startups to prove profitability before seeking funds and going public. Investors are eyeing profits after headline-grabbing IPOs from money-losing companies like Uber, Lyft and Peloton. WeWork abandoned its IPO plans after massive losses turned off investors. Uber shares tanked following its third-quarter earnings report showing a $1.1 billion net loss.