Companies That Raised Money In 2021 Are More Likely To See Layoffs

Can we predict layoffs?

With date, maybe.

During the first week of January, Carbon Health CEO They were Bali announced on Twitter the company would lay off around 200 people. Days later, according to Crunchbase data, the health care startup announced it closed a $100 million Series D round.

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Carbon Health’s news follows a similar pattern we have seen in 2021 and 2022 layoffs compiled by Crunchbase. After companies raised two massive rounds in the span of a few months, layoffs followed the next year.

“There was this growth-at-any-cost mindset where the main thing that was being rewarded in a venture-backed company’s ability to raise at a high valuation was revenue growth,” said Healy Jonesan executive at startup consulting firm Kruze Consulting. “That’s all people care about.”

You thought 2022 was bad? Brace yourself.

When I asked startup hiring experts what we can expect from layoffs in 2023, Continuum founder Nolan Church told me: “I think we’re going to double what we’ve done so far.”

That’s a bleak assertion, given 2022 ended with more than 107,000 job cuts to the US tech sector. The new year has just started, and 2023 is already almost a third of the way there. More than 30,000 people have been laid off from the tech industry in the US so far in January, according to Crunchbase data. We’re likely to see as many staff cuts this month as in November 2022, when layoffs peaked.

Church, whose company acts as a consulting agency for tech startups, is not the only one to make that prediction. Tech startup consultants say layoffs are likely to rise in 2023, in part due to how many startups raised massive amounts of money in 2021 at high valuations that cannot raise in today’s fiscal environment.

“What founders are thinking about right now is that we need to grow into that valuation in order to justify our existence. And that’s where the rubber meets the road,” Church said. “If you raised during this boom period, call it August of 2020 through Q1 of 2022, you likely have a valuation that you cannot yet justify.”

According to my analysis of startups that performed layoffs between September and December last year, the majority of companies announced raises in Q3 and Q4 of 2021.

In 2021, a golden age in private market funding, startups raised huge amounts of capital at high valuations. Now, the market is at a standstill — companies don’t want to raise down rounds, lest they lose their precious valuations, and venture firms aren’t willing to invest large sums of money in 2023.

That has contributed to an onslaught of layoffs in the tech industry. While the majority of laid-off tech workers came from public companies such as Salesforce 1, Amazon and Microsoftprivate startups account for around 60% of the companies on our Layoffs Tracker that have slashed their workforce.

Late-stage companies most at risk

“The companies that I’m most worried about are the ones that raised massive amounts of money at high valuations in early 2021, because those companies have huge valuations hanging over their necks,” said Jones. “Valuations have come down so much that even if those companies have grown their revenue, they may not actually be worth as much as what they raised at the last round.”

Let’s look at a few examples.

Gopuff, a Pennsylvania-based food delivery startup, raised a $1 billion Series H round in July 2021, four months after securing $1.2 billion in Series G funding, per Crunchbase News. The following January, the company announced its first layoff. It has since cut its workforce by around 2,300 employees over the course of three rounds of layoffs.

Another, fintech platform, Chimeraised $750 million in Series G funding in August 2021. By the following November, it had cut 156 people from its staff.

“For pre-IPO tech, early stage is going to continue moving,” Church said. “Late stage will continue to be in a [hiring] freeze until their valuation makes sense in today’s world.”

Illustration: Dom Guzman

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