Venture capital funding is drying up nationwide as public markets trade in bear territory and interest rates rise. That has set off a cascade of layoffs in tech startups from coast-to-coast.
Layoffs.fyi, which tracks startup layoffs worldwide, recorded 16,985 employees laid off in May, and another 9,891 were let go in June. That's compared to zero in May 2021 and 2,434 in June 2021.
The layoffs come as global venture capital funding fell 14% between April and May, according to Crunchbase. Overall, funding is down 20% from May 2021.
All of this prompted Y Combinator, a San Francisco-based startup accelerator, to notify its cohort companies in a memo last month to “plan for the worst.”
However, as founders and venture capitalists brace for a white-knuckle ride into an uncertain future, the wave hasn't been completely felt in the Twin Cities.
Through the first six months of 2022, Minnesota posted fewer venture capital deals overall, compared to the same stretch in 2021. However, both overall funding and early-stage funding is way up compared to last year, according to a Business Journal analysis of Crunchbase data.
To find out what startup investors and founders are thinking about a potential downturn and how they're preparing, the Business Journal asked several people involved in Minnesota's startup ecosystem their perspective on what to expect in the coming months. The following responses have been edited for length and clarity.
Danielle Steer, managing partner of Tundra Ventures, a Minneapolis-based venture firm that aims to invest in early-stage, underrepresented founders from diverse backgrounds.
Where does Minnesota fare compared to the coasts?
When you look at the valuations of, for example,fintech companies on the coasts, they were bananas high for a really long time, and kind of superficially inflated. That's because a lot of the larger VC firms were playing in that space, but they weren't necessarily investing in the Midwest. I think our valuations have always been right size. Our founders are poised for better success, because they're not running on these inflated metrics we've seen on the coasts. Historically, you've seen founders get funded with an idea on the back of a napkin in Silicon Valley. But here, you have to have customers, and revenue, and downloads, and clicks. That type of conceptual funding doesn't happen here.
Venture funding in Black-owned startups is also falling, does that create an even larger opportunity for Tundra Ventures?
Underinvested is a better return for investors at baseline. So when we look at our current portfolio, we've got six companies, 50% of which are founded by Black founders. We've got a huge pipeline of deal flow in our inbox right now of folks coming from a wide variety of cultural backgrounds that are bringing forward really great solutions. They're good deals with reasonable valuation tables, or valuation cap. I think this is going to be a time where we're going to get to prove out our thesis that these underinvested founders are building real scalable solutions that are going to create the relevant returns and win in the marketplace overall.
Liz Giorgi, co-founder and CEO of Soona, a same-day photo startup that makes content for e-commerce companies
What adjustments have you had to make to your business?
We made the decision in March, when we saw the writing on the wall, that we wanted to start building our enterprise business, because we thought that small and medium-sized businesses were really going to be hammered by this market. Another thing we've done is just really look at our burn. We made the decision not to try and open one more facility this year and just max the space that we had and control burn and really give ourselves the best possible chance of setting ourselves up for our Series C.
Are you still hiring?
We’re doing very slow hiring. We’ve moved from a sort of hire fast and hire furiously, to hire slow and more methodically. We have a few key positions open, especially in sales and around our senior product management roles. But I think we've just been a little bit more thoughtful and methodical than maybe we had in previous environments, which I don't know, maybe we should have all been more thoughtful.
Who are you looking to for guidance within your network?
I know it sounds funny, but I try to pay less attention to what other founders are saying and more to what my bankers are saying. They’re the most conservative of anybody, so getting a hold of the bankers and saying, "What do I need to be thinking about in terms of capitalization? What do I need to be thinking about in terms of our debt?" So, I think we're definitely looking to our bankers to be thought partners.
Matt Johnson, co-founder and CEO of Omnia Fishing, an e-commerce site that sells fishing tackle to anglers based on the fish, lakes and conditions they're likely to encounter in their area
Are you insulated from the trend being felt by startups on the coasts?
Everybody's talking about growth at all costs not being rewarded anymore. But we've always been focused on building brick-by-brick and building a very durable, real company. Because of our location or industry, we weren’t actually seeing, or accessing, massive growth-adjusted multiples. Our trajectory of growth has not slowed at all. We're angling for our first eight-figure year. We're still kicking a lot of ass and investing in the right places.
What does the future hold for the company?
We'd be stupid not to think that this will impact our business long term. I just think it's less of a swing for us. I'm actually getting a lot of inbound interest from VCs looking at our company and our growth rate, because of the durability of what we've built. There’s still a lot of capital these funds have to deploy. We probably will go out and raise another round this year and accelerate even faster.
Brett Brohl, managing partner of Bread & Butter Ventures, a venture firm specializing in food tech, health care and enterprise software as a service
What advice are you giving to founders?
There's a lot of advice around in a down economy of cut costs, cut costs, cut costs, and survive as long as you can if you're a founder. And that's true, but you don't want to go in and universally cut 20% of your costs across the board. You need to do it in an intelligent way and say, "What are the ancillary things that we've been doing for the past five years that we can cut and still survive? What are the things that aren't as core to your business?" It's not a smart strategy to just cut universally across the board. The smart strategy is to look through your entire business and see where you can cut those costs.
Is the Twin Cities ecosystem insulated from the broader slowdown?
A common complaint of Minnesota founders is its hard to raise venture capital in Minnesota. So I think there's a bit of a mentality of bootstrapping here. We are well-prepared as a community and an entrepreneurial community to work with less compared to other markets.
Ryan Broshar, partner at Matchstick Ventures, an early-stage venture capital firm specializing in Midwest companies
How are you advising your portfolio companies on what to expect?
Everyone's saying expand runway, you just don't know what's coming. We’re saying be very cognizant of the return on investment of any investment you’re making in your business. Be very strict around making sure every dollar counts across the board.
What are you expecting to see in the fundraising environment?
There will be a much tighter lens on the type of stuff that will get funded. I think that the really good companies are going to have no problem fundraising, because there's just so much capital available. The winners are going to win. It’s kind of that stuff in between that likely won’t do well. The past couple years, that stuff in the middle was just getting fundraised no matter what. There's just a lot of capital loose in the system. This stuff in the middle is really where you have to be wary of having a business that’s compelling and has good numbers. It can’t just be a good pitch deck anymore.
Frank Jaskulke, vice president of intelligence at Medical Alley Association, is a nonprofit that supports Minnesota's health care economy through research and sponsoring events
What are you expecting to happen?
Broadly, I think things will be kind of the same, unless the markets and the economy really tanked. Not to say that things haven't been going down, but venture funds raised a ton of money in the past couple of years. They have fresh piles of capital and valuations have come down. So you know, unless you think the economy will be bad for the next 10 years, this is probably a really good time to be an investor.
What are you telling members that are navigating this climate?
All the things that have been true before are still true. You have to be building a real business that solves a real problem. I think Minnesota companies have a little bit of an advantage in that our cost structure is lower. Not that it's easy, but there are companies that I bet are more suited for this environment here, then say companies in the Valley who have been used to getting $100 million on an idea.
