SVB’s failure is a double whammy for startups dealing with enterprise penetration

ChartHop CEO Ian White breathed a sigh of relief in late January after his cloud software startup raised $20 million. He began the process six months earlier during a tough period for tech stocks and a slump in venture capital funding.

In ChartHop’s previous round in 2021, White took less than a month to raise $35 million. The market hastily turned against him.

“There was just a complete reversal of the speed at which investors were willing to move,” said White, whose company sells cloud technology used by human resources departments.

Any comfort White felt in January quickly evaporated last week. March 16 – Thursday – ChartHop held its annual fundraiser at the DoubleTree by Hilton Hotel in Tempe, Arizona. As White spoke to more than 80 employees, his phone was buzzing with messages.

White walked off the stage to find hundreds of panicked messages from other founders about the Silicon Valley bank, whose shares had plunged more than 60% after the firm said it was scrambling to raise billions of dollars in cash to offset deteriorating deposits and late investments in mortgage-backed securities. .

Startup executives have been trying to figure out what to do with their money, which has been locked up at the 40-year-old firm, long known as a backbone of the technology industry.

“My first thought was, ‘this doesn’t look like FTX or anything,'” White said of the cryptocurrency exchange that collapsed late last year. “SVB is a very well-run bank.”

But the bank run continued, and by Friday SVB had been seized by regulators in the second-largest bankruptcy in US history. ChartHop banks with JPMorgan Chase, so the company had no direct exposure to the crash. But White said many of his startup’s customers are keeping their deposits with SVB and are now unsure if they will be able to pay their bills.

Although deposits were finally bolstered over the weekend and SVB’s government-appointed CEO sought to reassure customers that the bank was open for business, Silicon Valley Bank’s future remains highly uncertain, further hampering an already troubled funding environment startups.

SVB has been a leader in so-called venture debt, providing loans to risky early-stage companies in software development, drug development and other fields such as robotics and climate technology. Such capital is now widely expected to be less available and more expensive.

White said the SVB had shaken the confidence of an industry already struggling with rising interest rates and stubbornly high inflation.

According to the PitchBook-NVCA Venture Monitor, venture capital exit activity in the fourth quarter fell more than 90% year-over-year to $5.2 billion, the lowest quarterly figure in more than a decade. The number of transactions is down for the fourth quarter in a row.

Funding fell 63% in February from $48.8 billion a year earlier, according to Crunchbase’s funding report. Late-stage funding is down 73% year-over-year, and early-stage funding is down 52% over the period.

CNBC spoke with more than a dozen founders and venture capitalists before and after SVB’s collapse about how they navigated the volatile environment.

David Friend, a tech industry veteran and CEO of cloud storage startup Wasabi Technologies, hit the fundraising market last spring in an attempt to find fresh cash as public market ratios for cloud software plummeted.

Wasabi raised its previous round a year earlier when the market was reeling, IPOs and special purpose acquisition companies (SPACs) were booming and investors were drunk on low interest rates, economic stimulus and soaring earnings.

By May of last year, Friend said, several of his investors had backed out, forcing him to restart the process. Raising the money was “very distracting” and took up more than two-thirds of his time over nearly seven months and 100 investor presentations.

“The world was falling apart while we were doing the deal,” said Friend, who co-founded the Boston-based startup in 2015 and previously founded numerous other businesses, including data backup provider Carbonite. “At that time, everyone was scared. Investors just pulled, the SPAC market collapsed, tech company valuations collapsed.”

Friend said the market always bounces back, but he believes many startups don’t have the experience or capital to weather the current storm.

“If I didn’t have a good management team to run the company on a day-to-day basis, everything would have fallen apart,” Friend said in an interview before SVB collapsed. “I think we’ve broken through, but if I had to go back into the market right now and raise more money, I think it would be extremely difficult.”

In January, Tom Lavera, an investor at Institutional Venture Partners, took to Twitter to predict a “mass extinction” for early- and mid-stage companies. He said it would make the 2008 financial crisis “look quaint.”

Loverro was returning to the period when the market turned, starting in late 2021. The Nasdaq reached its all-time high in November of that year. As inflation began to jump and the Federal Reserve signaled interest rate hikes, many venture capitalists told their portfolio companies to raise as much cash as they would need for 18 to 24 months because a massive pullback was looming.

In a tweet that was widely circulated in the tech world, LaVerra said a “stream” of startups would try to raise capital in 2023 and 2024, but some would not get funding.

Next month marks 18 months since the Nasdaq’s peak, and there are few signs that investors are ready to return to risk. There hasn’t been a notable VC-backed IPO since late 2021, and there doesn’t appear to be one on the horizon. Meanwhile, late-stage VCs like Stripe, Klarna, and Instacart are sharply cutting their valuations.

Due to the lack of venture capital funding, unprofitable startups have had to reduce their burn rate to expand their profitability. Since the beginning of 2022, roughly 1,500 tech companies have laid off a total of about 300,000 people, according to Layoffs.fyi.

Kruze Consulting provides accounting and other ancillary services to hundreds of technology startups. According to the firm’s consolidated client data it shared with CNBC, the average startup had 28 months of runway in January 2022. In January of this year, that number dropped to 23 months, which is still an all-time high. At the beginning of 2019, it was less than 20 months.

Madison Hawkinson, an investor at Costanoa Ventures, said more companies than usual are going bankrupt this year.

“It’s definitely going to be a very difficult, very volatile year in terms of the viability of some early-stage startups,” she told CNBC.

Hawkinson specializes in data science and machine learning. It’s one of the few hot spots in startup land, largely thanks to the hype surrounding an OpenAI chatbot called ChatGPT that went viral late last year. However, being in the right place at the right time is no longer enough for an aspiring entrepreneur.

Founders should expect “significant and serious due diligence” from venture capitalists this year instead of “quick decisions and quick moves,” Hawkinson said.

Enthusiasm and hard work remain, she said. Earlier this month, Hawkinson held a demo event with 40 AI founders in New York. She said she was “shocked” by their polished presentations and positive energy amid the industry-wide gloom.

“Most of them stayed until 11 p.m.,” she said. “The event was supposed to end at 8.”

But in many areas of the startup economy, company leaders are feeling the pressure.

Matt Blumberg, CEO of Bolster, said the founders are optimists by nature. He founded Bolster in the midst of the pandemic in 2020 to help startups hire CEOs, board members and advisors, and now works with thousands of companies while making venture capital investments.

Even before SVB’s collapse, he saw how tough the market had become for startups after back-to-back record years of funding and a long period of venture capital-subsidized growth.

“I coach and mentor a lot of founders, and it’s such a group that they can’t sleep at night,” Bloomberg said in an interview. “They gain weight, they don’t go to the gym because they’re stressed or they’re working all the time.”

Venture capitalists are telling their portfolio companies to get used to it.

Bill Gurley, a long-time Benchmark partner, who gave his support Uber, Zillow and Repair of seamsBloomberg’s Emily Chung said last week that the bubble market won’t return until 2022.

“In these circumstances, my advice is pretty simple, which is what we’ve been through the last three or four years, it’s been a fantasy,” Gurley said. “Assume it’s okay.”

Laurel Taylor recently had a crash course in her new normal. Her startup Candidly announced a $20.5 million funding round earlier this month, days before SVB became front-page news. Candidly’s technology helps consumers manage education-related expenses like student debt.

Taylor said the fundraising process took her about six months and involved many conversations with investors about unit economics, business fundamentals, discipline and the path to profitability.

As a female founder, Taylor said she’s always had to deal with more scrutiny than her male counterparts, who for years have embraced Silicon Valley’s growth-at-any-cost mantra. More people in her network are now seeing what she’s been through in the nearly seven years since she started at Candidly.

“My friend, who happens to be a man, laughed and said, ‘Oh no, they treat everyone like founders,'” she said.

WATCH: A cash crunch could lead to more mergers and acquisitions and faster tech IPOs