The Strategist

Silicon Valley startups are downgrading their own estimates to receive investments, massive layoffs expected

05/04/2020 - 03:01

The coronavirus pandemic and venture capital shortages are pushing leading young technology companies to attract new investments at a discount to their estimates. Silicon Valley is waiting for mass layoffs, experts warn.

Leading young technology companies from Silicon Valley are lowering their own ratings in order to attract new investments amid the coronavirus pandemic and related economic problems, including a shortage of venture capital. 

A striking example of the trend is a startup developer Confluent data management systems. When the company’s team entered into negotiations with investors in early 2020, it expected to double its own valuation from the next round of financing - revenue for 2019 increased by almost 100%. Instead, the project, invested by star funds Sequoia Capital, Benchmark Capital and Index Ventures was forced to abandon the dream of being valued at $ 5 billion and agree to a more modest $ 4.5 billion. A round of $ 250 million last week was by led the investment company Coatue Management.

Other projects facing a similar problem include Samsara, a manufacturer of sensors and cameras for industrial enterprises and automobiles (according to FT, a new round is being discussed below the current estimate of $ 6.3 billion), and TripActions, a developer of control systems for the travel industry (according to FT , discusses a new round below the current valuation of $ 4 billion is under discussion).

Pitchbook reports that the Silicon Valley venture capitalists are sitting on a money bag of $ 120.4 billion, but they are not in a hurry to spend this money - there is too much uncertainty in the market and the prospects for overcoming the industry from the crisis generated by the coronavirus pandemic are too blurred.

As a result, the founders of startups are forced to agree to the conditions that infrequent daredevil investors offer. Some weren’t able to find sources of support at all and resorted to unpopular measures in the form of layoffs and severe cost cuts.

According to estimates by the head of the Industry Ventures fund, up to 80% of venture capitalists today are ready to invest in startups only at the level of previous or lower estimates of business value.

At the same time, most US startups will begin to experience a shortage of development resources before the economy, according to the IMF forecast, returns to growth at the end of 2020. "Companies will begin to close <...> Waves of layoffs will follow," the National Venture Capital Association stated in its review last week.