E42: Carta’s Peter Walker on Fundraising, Valuations, and Shutdowns
Feb 4, 2024
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Peter Walker, Head of Insights at Carta, discusses fundraising challenges, economic rate cuts, and the importance of equity for employees. They explore 'must-have' products, hiring talent, and the need for more new consumers. The podcast concludes with book recommendations and gratitude.
In 2023, the startup ecosystem faced fundraising difficulties and company shutdowns due to the challenging economic landscape.
The stigma around down rounds and the impact on equity value created psychological barriers for founders and employees.
The labor market in 2023 was turbulent, with layoffs and reduced compensation, leading to challenges and disparity for employees compared to founders in terms of equity.
Deep dives
The Challenges of Fundraising and Valuations in 2023
In 2023, the startup ecosystem faced numerous challenges, including fundraising difficulties, valuation drops, and layoffs. The year started with a gloomy sentiment, but as it progressed, there was some positive news. Inflation stabilized, and the Fed announced plans for rate cuts in 2024, providing some relief to the market. However, fundraising remained choppy, and many companies struggled to adapt to the new economic landscape. The future remains uncertain, with questions about the recovery and the potential impact of interest rate cuts on startups.
The Rise of Shutdowns and Down Rounds
The year 2023 saw a significant increase in shutdowns, with many companies running out of cash or unable to raise more funds. Down rounds and complex funding structures made it challenging for companies to pivot or attract new investment. The pandemic also exposed companies with products that were perceived as nice to have rather than essential. The stigma around down rounds and the impact on equity value created psychological barriers for founders and employees. It remains to be seen whether M&A activity will provide an alternative exit for these companies.
Impact on Labor Market and Compensation
The labor market in 2023 was turbulent, with layoffs and hiring changes impacting the tech industry. Many companies downsized or struggled to raise new funds, leading to layoffs and reduced headcounts. Compensation, both in terms of salary and equity, faced downward pressure, with equity grants diminishing by around 25%. Understanding equity remains a challenge for employees, leading to low exercise rates and a lack of belief in the value of their equity. The compensation landscape for employees continued to present challenges and disparity compared to founder equity.
The Changing Landscape of Venture Capital
The podcast episode discusses the changing landscape of venture capital and the potential shift in startup funding. One main idea is that founders of startups believe they are building unique and exceptional companies, and thus may not prioritize profitability and efficiency like traditional businesses. This mindset may contribute to a decrease in the number of companies reaching venture scale on their own without raising money. Another key point highlighted is the increase in bridge rounds and the prevalence of onerous terms such as high liquidation preferences and participating preferred stock. These terms have become more common and may leave founders with limited upside if their companies perform well. The podcast also touches on the future predictions for venture capital funding in 2024, with an expectation of increased fundraising activity but also a potential rise in shutdowns and layoffs.
Importance of Total Compensation and Consideration of Equity Structure
The podcast episode explores the concept of total compensation and challenges the traditional view of salary and equity as the sole components. It emphasizes the need for founders and companies to consider the overall investment made in employees, including opportunities for growth and development. The discussion raises the importance of aligning compensation with the actual value perceived by employees. Additionally, there is mention of potential changes in equity structures, such as profit participation units, that could incentivize profitability and provide clearer value to employees. The episode acknowledges the complexity of compensation and the need for companies to balance the cost of living with appropriate cash compensation, as well as the potential impact of layoffs and shutdowns on the job market. Finally, the conversation touches on the evolving role of AI in startup investment and the debate around its valuation impact.
Carta’s Head of Insights, Peter Walker, joins our hosts to discuss the implications of economic rate cuts, company shutdowns, and the challenges founders face during fundraising. The discussion also covers the best investment opportunities today and the importance of equity for employees and organizational health in companies.
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