In May became venture capital firm Sequoia circulated a note among its startup founders. That 52 page presentation warned of a challenging road ahead, paved by inflation, rising interest rates, a Nasdaq downturn, supply chain problems, war and a general fatigue over the economy. Things were getting tough and this time venture capital would not come to the rescue. “We believe this is a Crucible Moment,” the company’s partners wrote. “Companies that move the fastest and have the most runways are most likely to avoid the death spiral.”
Lots of startups seem to be following Sequoia’s advice. The mood has become direct burial as founders and CEOs are cutting 2021 profits from their budgets. Most significantly, these reductions have affected the number of employees. More than 10,000 startup employees have been laid off since early June, according to Layoffstracker.com, which catalogs cuts. Since the beginning of the year, the number is closer to 40,000.
The recent victims have been crypto companies and the carnage is not small. On Tuesday, Coinbase was fired 1,100 employees, abruptly cutting their access to corporate email accounts and locking them out of corporate Slack. These layoffs came days after Coinbase withdrew job offers from more than 300 people who planned to start working there in the coming weeks. Two other crypto startups—BlockFi and Crypto.com– each laid off hundreds of jobs on Monday; the crypto exchange Gemini also terminated approx 10 percent of its staff earlier this month. Altogether, more than 2,000 employees of crypto-startups have lost their jobs since early June – about a fifth of all startup layoffs this month.
The conversation about crypto companies has changed abruptly in the last year. By 2021, they were the beloved venture capitalists who showered them with billions of dollars to fund aggressive growth. Coinbase, which was listed in April 2021 at $ 328 per share, seemed to be proposing a new gold mine in the sector. Other companies, such as BlockFi, began to hire aggressively with ambitions to be listed. Four crypto startups released expensive primetime ads in the recent Super Bowl.
Coinbase was also focused on hypergrowth, scaling its staff from 1,250 in early 2021 to around 5,000 in 2022. “It’s now clear to me that we were overcharging,” wrote Brian Armstrong, Coinbase’s CEO, in a blog posts Tuesday, where he announced the layoffs. “We grew too fast.”
“It could be that crypto is the canary in the coal mine,” says David A. Kirsch, associate professor of strategy and entrepreneurship at the University of Maryland’s Robert H. Smith School of Business. He describes the contractions in crypto startups as a potential signal of “a big unraveling”, where more startups are being evaluated for how well they can live up to their promises. If history is any indication, those who cannot are doomed to the “spiral of death.”
Kirsch has spent years studying the experience of previous crashes; he is also the author of bubbles and crashes, a book on boom-bust cycles in technology. Kirsch says the bubble tends to appear first in sectors with high leverage and high growth. For example, when the Nasdaq fell in 2000, the value of most e-commerce companies disappeared “well in advance of the wider market downturn.” Companies like Pets.com and eToys.com – which had made big, bubbly public debuts – eventually went bankrupt.