In May, the venture capital firm Sequoia circulated a memo among its startup founders. The 52-page presentation warned of a challenging road ahead, paved by inflation, rising interest rates, a falling Nasdaq, supply chain problems, war and a general weariness about the economy. Things were about to get tough, and this time, venture capital wasn’t coming to the rescue. “We believe this is a Crucible Moment,” the firm’s partners wrote. “The companies that move the fastest and have the most leads are most likely to avoid the death spiral.”
Many startups seem to be heeding Sequoia’s advice. The mood has turned downright gloomy as founders and CEOs cut 2021 excesses from their budgets. Most importantly, 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 job cuts. Since the beginning of the year, the account has approached 40,000.
The latest victims have been crypto companies, and the carnage is not small. On Tuesday, Coinbase laid off 1,100 employees, abruptly cutting off their access to corporate email accounts and locking them out of the company’s Slack. Those layoffs came just days after Coinbase terminated job offers for more than 300 people who planned to start working there in the coming weeks. Two other crypto startups: BlockFi and crypto.com—each cut hundreds of jobs on Monday; cryptocurrency exchange Gemini also laid off around 10 percent of its staff earlier this month. Collectively, more than 2,000 crypto startup employees have lost their jobs since the beginning of June, roughly a fifth of all startup layoffs this month.
The conversation around crypto companies has changed abruptly in the last year. In 2021, they were the darlings of venture capitalists, who showered them with billions of dollars to finance aggressive growth. Coinbase, which went public in April 2021 at $328 a share, seemed to suggest an emerging gold mine in the sector. Other companies, such as BlockFi, began hiring aggressively with ambitions to go public. Four crypto startups took out expensive prime-time ads in the most recent Super Bowl.
Coinbase also focused on hyper-growth, scaling its staff from 1,250 in early 2021 to around 5,000 in 2022. “It is now clear to me that we over-hire,” Coinbase CEO Brian Armstrong wrote in a blog post on Tuesday. . , where he announced the layoffs. “We grew too fast.”
“It could be that cryptocurrencies are the canary in the coal mine,” says David A. Kirsch, an associate professor of strategy and entrepreneurship at the Robert H. Smith School of Business at the University of Maryland. He describes contractions in crypto startups as a potential sign of “a big unraveling,” where more startups are evaluated to determine how well they can deliver on their promises. If history is any indication, those who can’t are destined for “the death spiral.”
Kirsch has spent years studying the lessons of previous accidents; he is also the author of bubbles and crashes, a book about the boom and bust cycles of technology. Kirsch says that the bubble tends to burst first in high-growth, high-leverage sectors. When the Nasdaq crashed in 2000, for example, the value of most e-commerce companies vanished “long before the general market crash.” Companies like Pets.com and eToys.com, which had made big and flashy public debuts, eventually went bankrupt.