Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
As global startup markets enter a slowdown — more on that shortly — we’re starting to get notes on when growth-oriented firms are going to run short of cash. Of course, startups around the world are cutting staff and trying to limit costs as macro uncertainty reins, but their efforts won’t save everyone.
This morning, let’s dig into what venture’s impending investment pace may look like over the next year or two, courtesy of Upfront Ventures‘ Mark Suster. Then we’ll parse cash runway data from UK and Belgian startups. The resulting picture is one detailing falling cash accounts for a number of startups that could reach zero before venture trends are expected to recover.
Downturn
After SaaStr was forced to delay its yearly software conference, the group’s founder, Jason Lemkin, organized a virtual event called “Bridging the Gap,” which included talks from a number of startup and venture capital names.
It was one of these talks that detailed what Mark Suster expects from the venture capital space over the next few years. As Lemkin summarized, Suster anticipates the venture “slowdown” to last from three to eighteen months. That’s a range of not very long to incredibly long. Even more, Suster expects 2021 to be a worse year than 2020 for venture activity.
That’s a long period of pain. Indeed, in one slide that Lemkin highlighted, Suster noted that many startups have nine to eighteen months of cash, which means that Q1 and Q2 of 2021 could be the nadir for startups that can’t raise; cash is going to be all but gone by then, leading to more bankruptcies and painful startup recapitalizations.
How accurate are these estimates? Well, we have new startup data to support Suster’s cash expectations, and some slightly dated information that may paint his take as actually rosy.
Europe
All our data this morning is from Europe, meaning that we’re niching down some in terms of our geographic footprint. That said, startup markets resemble each other so we can extrapolate from our foundation. As noted on Equity Monday this morning, a recent survey concerning startup health amongst young companies in the UK indicated the following (rounded to the nearest 1%) showed how long startups from the country can last without more funding:
- 19% of the 200 U.K. startups surveyed had less than 6 months of cash
- 22% had 6-12 months of cash
- 32% had 12-18 month of cash
- 16% had 18-24 months of cash
- 12% had more than two years of cash
If venture activity remains depressed for some time, as Suster expects, you can begin to see the portion of UK startups that will be in trouble is large. Only 38% can survive without fundraising for eighteen months, and nearly one in five dies before Q4 2020 even starts without new capital.
This timeline kills off a host of startups and hoped-for venture returns, even if there is an odd bit of normalcy to the math. How so? As TechCrunch’s Steve O’Hear noted earlier today:
The answer is mostly yes. Startups often raise on an eighteen month cadence, so provided that the average startup is midway through a venture cycle, it would have about nine months of cash. The same survey noted that many companies are cutting costs, so we can expect runways as reported to have stretched a bit. But it’s not the cash balance, per se, that’s the main issue today. Instead, it’s the world’s slowing venture cadence.
Startups with regular-ish cash timelines running headlong into a slowing venture cycle is a recipe for upstart insolvency.
There’s some indication that things could be worse than we’ve outlined. Tech.eu reported on some survey data last week, executed by the Belgian startup scene that yielded nearly 200 responses. As the publication detailed, the resulting data indicated that “78[.]2% of those startups say they experienced a significant revenue loss in March 2020,” when COVID-19 began to bite, and that “the number of startups [in the country] with a cash runway of 0 to 6 months was about 15% before the current crisis, [and that since then the] number has ballooned to almost 50%.”
Perhaps UK startups are better capitalized than those in other markets? If that’s the case then startup world could be in for an even sharper jolt of layoffs and shutterings than we’d otherwise expect from merely observing Suster’s thoughts and our first survey. Anecdotally I’m hearing about far more layoffs and cost-cutting than shutdowns. But with news stories noting that the pace of startup unwinds being up dramatically, perhaps there is an undercurrent of startup failures that we’re missing.
Either way, the cash countdown is upon us for startups whose markets dried up, aren’t growing fast enough or lose too much money. The winnowing is upon us.