The cashflow statement of the startup industry spells trouble ahead
With all the unfortunate drama around Silicon Valley Bank, it drove home one point really clear: SVB is THE bank catering to the startup industry and it’s systemic. In their Q4 2022 Report they stated that close to 50% of the VC backed tech and life sciences industry are a customer.
So I had a closer look at their “Total Cashflow Chart” from their Q1 2023 Mid Quarter Update https://ir.svb.com/events-and-presentations/event-details/2023/Q123-Mid-Quarter-Update/default.aspx.
This chart should be able to serve as a consolidated cashflow statement of the industry:
The big picture is, that collectively the startup industry is drawing down funds raised up to Q4 2021 and has a negative cash flow since then.
Obviously this is mostly driven by a decrease in inflows, which are in Q1 2023 below 50% of the Q3 2021 high water mark:
Looking at the composition of inflows, the biggest driver has been a decrease in fundraising activity. It also shows, however, how operating inflows are decreasing. This means, that collectively the startup industry doesn’t only face a decrease in growth rates but is actually shrinking.
My estimate is, that 1/3 of operative cash inflows have evaporated. May that be due to tighter budgets in an economic down cycle or the cost savings kicking in, but operative cash flows are shrinking:
Potentially, I only find it a noteworthy data point given that I’m a SaaS investor and this is more normal in other market segments. Lesson learned from my time in the .com boom: a stable and “boring” business model is a really cool thing in tough times.
Lastly, the cash outflows also show a very interesting pattern: One of my observations of 20+ years in the software industry as an operator and investor is that when the going gets tough costs become a constant and revenues the variable which is decreasing. You can also see this pattern emerging in this downturn:
After all the already very painful restructuring and course corrections, Q1 2023 marks the first quarter where the collective cash burn is actually lower than the now widely as “unsustainable” declared Q3 2021 level.
This will lead to two things out of my perspective:
a) there is a massive backlog in fundraising coming on the market
b) there is much more pain to come for startups which can’t raise since in that scenario cash burn must reach 0 eventually.
Shameless self promotion: we are an active B2B SaaS investor. We are now more bullish than ever and actively investing. If you are a B2B SaaS startup and you don’t want to wait raising until everybody else is rushing into the market — just reach out to markus@senovo.vc
LFG!
