As stocks continue to tumble, what’s ahead for startups?

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

The world is a mess today. Everything that trades is down, and sentiment is in the toilet. Even Robinhood is undertaking its ritual downtime, ensuring that its userbase holds through the selloff. The unicorn’s inability to stay online could be viewed as feature instead of a bug. How? Because it prevents panic selling, we suppose.

On a more serious note, what is going to happen to startups during all of this? In honor of thinking out loud, I have a few guesses that I wanted to write down. As always, though, I want to hear from you. Email in if you have a prediction that’s worth sharing.1 I might post a few later in the week.

For everyone in a hurry, here’s my set of guesses (details below): SaaS valuations retreat, but retain their premium; D2C’s problems multiply, but select players survive; customer acquisition costs (CAC) issues lessen as spend slows; venture totals slip materially in Q1 (never mind what you read on VC Twitter); Q1 IPOs are garbage and Q2 doesn’t get much better unless stocks return to highs.

Let’s dig into each in detail.


To save time, we’ll proceed in bullet points:

  • SaaS valuations: As I write to you this morning, SaaS and cloud stocks are off nearly 6.6%. Equities in SaaS and cloud companies are now down since last summer and are testing new lows for the year. It’s bad but not lethal. What made SaaS companies valuable during the boom will protect them some today, when things are bad. How so? Recurring revenue’s relative stability will help SaaS companies avoid revenue contractions. Sure, growth will slow and revenue multiples will contract, but compared to other venture-backed categories, SaaS companies are sitting pretty. (High margins won’t go out of style).
  • D2C startups will suffer: It’s safe to ding D2C companies today in the wake of Casper’s pretty catastrophic IPO. Journalist Maya Kosoff has a good piece out today on Marker looking into the mess. But what makes SaaS durable in the current market (again, on a relative basis) is inverted with D2C. Instead of recurring revenue, D2C brands often have to acquire new customers to grow; this is expensive and harms operating margins. Casper is off over 20% today. Its declines will harm the fundraising environment for other D2C companies, large and small. The best will survive, as always, but a lot of companies that had thin brands and weak economics are probably doomed.
  • CAC: Customer acquisition costs (CAC) are probably not going to get worse. In some sectors, they might even get a bit better. CAC has been drifting higher in various places (fintech, D2C, etc) where there has been both capital and competition. But if startups pull back spend to conserve cash — which we expect is already happening — perhaps CAC itself will dip? That would be a boon to any number of young, growth-oriented companies, the types of firms that we call startups.
  • Venture capital slows: We’ve covered a few early warning signs that the venture market is cooling. Of course, looking at partial-quarter datasets, zoomed all the way into sectors is, by definition, either short-sighted or myopic, respectively. But as the markets get worse as the quarter goes on, and exits remain flat-out-weak, why would venture trends improve? They won’t. Expect Q1 2020 to be a local minimum when we get all the numbers in.

Oh, and IPOs. There aren’t that many companies that have filed, let alone publicly. And while everyone remains utterly scared, don’t expect to see much more activity. Who wants to go public when the knife is still falling?

  1. Subject line: ‘What’s going to happen,’ please.