As the private fundraising market becomes increasingly parsimonious, startups raising capital previously valued purely on growth with no care for operating burn will have to endure the market’s sentiment shift in their proximate funding round. Startups that lack impressive growth and have high levels of burn? They’re likely in even more trouble.
Precisely how many startups that raised during 2021’s aggressive fundraising climate will struggle to raise their next round at anything more than a flat valuation is not clear. But we’re starting to get an early indication.
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The current conversation over on tech Twitter yesterday evening and this morning centered around a piece of reporting from The Information’s Malique Morris, in which he discussed the travails of the one-click checkout market.
It’s an active startup space, with a number of richly funded competitors striving for market share.
Morris reports that Fast, backed by Stripe and covered by TechCrunch during its fundraising cycles, generated revenues of around $600,000 last year. That’s thin, given that the company’s last funding round was worth $102 million in January 2021. At the time, here’s how I discussed the company’s growth metrics:
TechCrunch reached out to Fast for comment regarding its growth pace. The company shared that gross merchandise volume (GMV) processed by its checkout service has “more than tripled each month,” adding that it expects that “trend to continue and increase.” The growth pace is hard to rate as we lack a base from which to scale, but we do now have an expectation for future GMV progress from Fast that we can use as a measuring stick.
Fast declined comment today on its reported revenue figures.
The discrepancy between the pseudometrics Fast shared around the time of its nine-figure Series B and its end-of-year result exemplifies why TechCrunch has worked in recent years to get hard numbers from startups. My hunch has long been that startups unwilling to share data are not declining to do so out of fear their competitors will learn their ARR scale, but because they would struggle to explain the massive delta between their operating results and valuation.
The Fast saga makes me even more convinced of that perspective.
But I don’t want to talk about Fast, not really. It’s just one of the companies that took advantage of the cash bonanza that kicked off in late 2020 and ran through the end of 2021. I want to talk about all the startups that raised at valuations that their ARR could not support, the startup equivalent of writing checks that one’s backside cannot cash.
Fintech venture capitalist and newsletter-er Nik Milanovic made a somewhat tongue-in-cheek point about the Fast matter — and how much we should be looking askance at the company compared to the larger results of the 2021 venture boom:
I dunno … $1B with $600k arr doesn't sound too different from $11B with $30mm
— Nik (@NikMilanovic) March 30, 2022
There is a difference, as a startup with an eight-figure ARR has managed something that the sub-$1 million ARR company hasn’t, namely breaching the $10 million revenue mark. In this case, Milanovic is comparing the valuation of Fast with the revenue and valuation of Bolt, a competitor. Again, we’re not precisely interested in the one-click checkout market as much as we are fascinated by the speculative prices attached to high-growth startups — and what the hangover will look like. That both companies look expensive is an indication that many startups are going to need aspirin.
Chatting with private-market players earlier this week, we talked about how Instacart’s move to revalue itself for the purposes of employee comp mattered because it opened the door for other startups to do the same. But how far can you discount a valuation to raise more capital while also needing quite a lot of funds? Given Fast’s burn rate, it needs more money. And if its valuation slips, that capital is going to cost pounds of flesh. So what does it do? Mass layoffs? It’s a pickle.
In a sense, the 2022 question regarding how many paper unicorns will wither, and where they are headed, is basically the inverse of the 2021 unicorn IPO market. Instead of hot startups getting new, larger prices attached to their work, formerly hot startups are potentially staring down new, lower valuations.
Yuck. Now, let’s spend the rest of the day watching the latest Y Combinator class graduate, and hope that they don’t expect 2021 to come back anytime soon. At least as they do their financial planning.
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