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European venture capitalists are advising start-ups in their portfolios to cut costs and freeze hiring as economists warn that another recession is inevitable. Their Silicon Valley counterparts do the same.
After a stormy 2021 filled with IPOs and mega-funding rounds, some of the most valuable start-ups in Europe are now laying off significant numbers of employees and scaling back their expansion plans drastically.
“The general advice is to renew [the] runway,” Michael Stothard, an early stage startup investor at Firstminute Capital in London, told CNBC. That means they should either cut their costs or try to raise more capital if they can, he added.
Nathan Benaich, a venture capitalist at Air Street Capital in London, said the industry in general has advised companies to be more conservative rather than encouraging the go-go plans of yesteryear.
“For my part, I think it makes sense to focus on what’s working in the business today versus planning long-term betting until we get a better picture of the market,” he told CNBC.
Fred Destin, founder of VC firm Stride, told CNBC that the advice offered varies from start-up to start-up, but in general he urges entrepreneurs in his portfolio to cut costs where possible.
“Lower projected demand and slower financing markets really call for action,” said Destin, who has led investments in European unicorns such as food delivery service Deliveroo, real estate platform Zoopla and car retailer Cazoo.
There are signs that founders are listening to their investors, who often have seats on their boards.
Swedish fintech giant Klarna, which became Europe’s most valuable start-up last June when it was valued at $46 billion, announced last week that it plans to lay off about 10% of its global workforce.
The buy-now-pay-later firm, which employs about 6,500 people worldwide, is reportedly looking for more money at a significantly lower valuation of about $30 billion.
There is a paradox in the fundraising space. Data from VC analytics firm Pitchbook shows that VCs have more money than ever, yet are scaling back their investments to see how the economic environment develops.
Oscar White, CEO and founder of travel technology platform Beyonk, told CNBC this poses a problem for founders who raised money at high valuations during the Covid pandemic and will run out of money next year.
“They will probably have to raise during a downturn if we go into a recession,” White said, adding that guidance for portfolio companies from many VCs is to focus on capital efficient growth and aim for a runway until 2024.
“I’m optimistic that we’ll continue to increase and be able to invest in growth, because investing won’t completely stop,” White said, adding that it will only get more competitive.
‘Come through to the other side’
With technology stocks collapsing in the first five months of 2022 and the Nasdaq stock market heading for its second worst quarter since the 2008 financial crisis, startup investors are telling their portfolios they are not immune to the fallout.
Startup incubator Y Combinator, which helped create Airbnb and Stripe, said last week that companies need to “understand that the poor public market performance of tech companies is having a significant impact on VC investment.”
“It will be a longer recovery and while we can’t predict how long, we can advise you on ways to prepare and penetrate the other side,” said Sequoia Capital, the iconic venture firm known for early bets on Google, Apple and WhatsApp, wrote last month in a 52-page presentation titled “Adapting to Endure,” of which CNBC got their hands on a copy.
Hussein Kanji, a partner at Hoxton Ventures, told CNBC that European start-ups are just beginning to get the message.
“I think people only got the memo in Europe last week or the week before,” he said.
Elsewhere in Europe, the rapid growth of grocery delivery has come to a halt. Last week, two of the largest instant apps, Getir and Gorillas, announced decisions to lay off hundreds of employees. Another company, Zapp, said it is proposing layoffs in its UK team.