When venture markets flip from greed to fear, there’s a meme that goes around in startup circles that flat is the new up. It’s shorthand for the idea that in more difficult market conditions, a startup defending its prior valuation in a proximate venture round is as good as raising new capital at a higher valuation in better investing conditions.
The brutal repricing of tech companies in the last year has led to some notes — including from this publication — that we had once again found ourselves in flat = up territory. Today, however, the game looks a little bit different.
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News that Stripe is reportedly trying to execute a soft layoff by culling lower-performing staff landed today, along with news that Databricks, one of the other most valuable startups of all time, trimmed its internal (409A) valuation by a modest amount, around 7%.
Naturally, you might look at the news and think, dang, some of those unicorns did get out of pocket last year! After all, fintech giant Stripe took a 28% haircut to its own internal valuation earlier this year, so surely we’re seeing signs of excess being drained out of the market?
Actually no, not really.
In fact, I think that recent valuation trims and planned staff cuts at both companies represent strength. Not in that looking to curtail personnel is bullish; it’s not. But in a market where we have seen a host of recent tech unicorns lose most, if not all, of their value on the public markets, and a presumed similar level of yet-hidden destruction in the private markets, what Stripe and Databricks are enduring seems pretty darn small.
Show me the pain
To illustrate why the Stripe and Databricks moves feel like small potatoes, let’s walk through some recent news concerning what other companies are dealing with. I’ve picked three categories for the sake of looking for examples in more than one place.
Read the following notes on insurtech, gig economy and consumer fintech companies, and then contrast their pain with the Stripe and Databricks news we discussed above:
- The insurtech startup cohort rode the 2021 boom straight to the public markets. Now, Root and Hippo are worth less than they raised while private, and Lemonade has given back most of its value even after consuming MetroMile, another public-market insurtech mess.
- The gig-economy startup collection has proved itself to be a value deletion machine. Oversharing ran an analysis of post-IPO performance of sharing-economy companies, and the results are grim. Two are up and the rest down, some as much as 97%.
- Finally, consumer fintech companies, once hotter than the center of the sun, are now sitting somewhere around L2 with the James Webb Space Telescope in the insane cold of outer orbits. How do we know that? Recent IPOs Coinbase and Robinhood have given back more than half their value when compared to post-debut highs. Even more, PayPal was worth nearly $260 per share last year; now it’s worth around $85. Block got up to at least $275 per share. Today, it trades for $55.44. Startups and Big Tech alike in this category have seen their valuations collapse.
The valuation haircut at Databricks and the somewhat stiffer reduction at Stripe are material, but precisely nothing compared to what we have seen at other companies. So, should these yet-private valuations hold up, we can say that at least some of the hottest companies of 2021 are mostly intact in 2022. And that’s a win.
Finally, what about staffing cuts, by knife (layoffs) or by leech (limiting backfills, using reviews to cull headcount)? What Stripe is reportedly working on is at once not unique and not a big deal. It’s hard to find a tech company today that’s not finding a way to shed costs. Meta is widely thought to be looking to cut headcount, and even Microsoft has seen cuts. So to see Stripe slowly triaging its staff, well, again, is not great. But it’s just not that bad.
And in 2022, not that bad is bullish as hell when we’re defending 2021’s excesses in a period of increasingly expensive money.
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