Tech start-ups trim headcount before raising new funds – Financial Times


A month into the pandemic software provider Carta laid off 160 employees while finalising a round of funding that almost doubled its valuation.

Carta’s situation is far from unique. This year more than 20 start-ups have raised capital at higher valuations compared to previous funding rounds despite laying off or furloughing employees, according to a Financial Times analysis of data from PitchBook and Layoffs.fyi, a website that tracks job cuts in the tech sector.

At least seven, including Carta, Sonder and Stack Overflow, have managed to raise venture funding at higher valuations after laying off staff, according to the data. Collectively, these start-ups have cut close to 700 jobs, or about a fifth of their workforce on average, just months before securing new investment. 

The analysis is likely to underestimate the true extent of companies laying off employees and then soon after securing deals at higher valuations as many private companies do not choose to announce capital raises or layoffs.

The data show how the pandemic prompted even the most well-funded tech companies to slash costs, especially in businesses directly exposed to hard-hit industries such as retail and travel.

It also points to a delicate balancing act for start-up founders, who have relied on ample private capital to fund cash-burning business models and raise funding at rising valuations, drawing in valuable engineers with the promise of lucrative stock packages. 

At the onset of the pandemic, many venture capitalists advised executives to make decisive cuts to preserve cash in case they could not raise funding in the next 18 to 24 months. More than half of the announced jobs cut this year were made in April — at the beginning of the crisis. 

Chart showing workforce cuts by tech companies since the pandemic

In one widely circulated memo, Sequoia Capital warned its portfolio companies that coronavirus would be the “black swan” event of 2020. 

READ  Open Source Licences Which You Need to be Aware of Before Filing Copyright

Instead, tech companies have emerged as some of the biggest winners of the crisis, benefiting from the rise of remote working and increased reliance on internet applications. 

“It’s become clear that a lot of the earlier fears have not materialised,” said Roger Lee, the entrepreneur who founded Layoffs.fyi. “Fast forward a few months — the fundraising environment is roaring again.”

Mr Lee said it would have been difficult for company founders to know that fundraising would rebound so quickly, and some start-ups have since rehired affected employees.

Several start-ups made deep cuts early on in the pandemic, despite having raised hundreds of millions of dollars earlier this year.

In February, the restaurant payments start-up Toast raised one of the largest rounds of funding this year, receiving $400m in capital that valued the company at $4.5bn, not including the new cash infusion — an increase of $1.8bn on its previous valuation.

Less than two months later, the company said it would cut its workforce of “Toasters” by about half through lay-offs and furloughs, citing “limited visibility” into how the restaurant industry would recover. Toast did not respond to a request for comment.

Chart showing job cut and valuation increases for tech companies

Some start-ups rebounded quickly after cutting employees. Sonder, a short-term rental company, laid off or furloughed about one-third of its workforce during the onset of the pandemic in March. Three months later, the company raised funding giving it an increased valuation of $1.3bn, including $170m in new cash.

In a statement Sonder said it was “grateful to have been able to bring back a number of furloughed employees” in recent months.

READ  RBI has opened a pipeline of funds for startups, home buyers and green power producers too - Business Insider India

Will Hunsinger, chief executive of the Silicon Valley recruitment firm Riviera Partners, said it “wouldn’t be unprecedented” if companies raising funding during the pandemic had made cuts “directly related to guidance that they’re getting from the investors”.

Carta’s cuts largely affected customer service employees working with start-ups that use the company’s software to manage their shareholder tables.

Henry Ward, chief executive of Carta, said the company’s lay-offs had little to do with its fundraising, which has been put towards the development of a new exchange for private tech shares. Mr Ward’s public announcement of the lay-offs received 9,500 “claps” from readers on the publishing site Medium.

“As customers went down, we had to reduce the number of people that were servicing those customers,” Mr Ward said during an interview in May. “That doesn’t mean that we don’t need balance sheet [capital] that we’ll continue to invest in projects that will then generate income statement revenues two to five years out from now.”

Additional reporting by Patrick Mathurin and Chris Campbell



READ SOURCE

LEAVE A REPLY

Please enter your comment!
Please enter your name here