Startups react as recession fears grow – InsuranceNewsNet

After several years of what seemed like unfettered growth, the center from ohio Young tech companies are finding they need to act like their more established brethren, as a potential recession puts more pressure on them to control costs.

In July, health technology company Olive cut 450 jobs and last month Root cut 20% of its staff, or 137 jobs, in the second round of layoffs this year for the start-up company. ‘car insurance.

mortgage lender Lower.comwho bought the naming rights of the new Crew Stadiumlaid off an unknown number of workers this summer, blaming rising interest rates, according to media reports.

Similarly, financial technology company Upstart has reduced the number of workers helping to process loan applications by 140. Some of these jobs were in Columbusthat the lender has designated as the second registered office.

What companies are experiencing locally is being felt elsewhere in the country, as tech companies ranging from Facebook parent company Meta to Amazon to Twitter have cut tens of thousands of jobs this year.

“We go through cycles. We’ve been lucky. We haven’t been through this for a long time,” said Max BrickmanFounder and Managing Director of Heartland Ventures, an Easton-based venture capital firm. “Now is not the time to panic.”

Startups typically lose money and need cash as they grow, sometimes having to double their headcount within months and then having to double again about a year after that, he said. That money becomes more expensive as interest rates rise, putting more pressure on the founder to use capital more efficiently, he said.

“2021 has been like an open bar,” Brickman said of the money available for start-ups. “It’s more like a hangover.”

“Interest rates, inflation and rising costs of everything, uncertainty, a slowing economy and employee compensation for highly competitive technical talent have increased in recent years,” said Matt Armsteadwho has created several companies, invested in startups and is a partner at Columbus-based Horizon 2 Laboratories, which helps get businesses off the ground. “It’s the culmination of these things and the market expectations of these companies – having lifted so much or being valued so much – we’re just at a point where these things need to be realigned.”

Start-ups, tough decisions

The founders and CEOs of these companies say making cuts is the hardest job they’ve had.

“To further improve cash flow, we are prioritizing resources that support Root’s future strategy,” said Root’s CEO and co-founder. Alex Tim said in a letter to shareholders as part of the company’s release of its third-quarter financial results last month. “As a result, we have made the difficult decision to reduce our workforce by approximately 20 percent.”

“It’s the hardest decision I’ve had to make as CEO,” said Sean Lanewho founded Olive in 2012. “But I do so knowing that this is the right strategy for us to achieve Olive’s mission. I am inspired by what we have done and will continue to do to ensure the transformative impact d’Olive for many years to come.”

Armstead said the cuts reflect a balancing act for fledgling businesses that must control costs to weather the uncertain times ahead while scaling up what works.

“Our startup ecosystem is maturing; that’s the reality, and it’s important to recognize and appreciate what’s happening,” he said. “We’re on par with some of the more established startup scenes like Silicon Valley, Boston (and) New York. The objective is no longer to grow at all costs, but rather to focus on the fundamentals and better align with profitability.”

Jobs are still plentiful in a recession, but…

Despite the cuts, there are no signs of a slowdown in demand for workers in Ohio – for the moment.

Although some technology companies in Great Columbus are shedding jobs, the region as a whole added 25,500 solid jobs over the past year, according to state jobs data.

Statewide, there were 305,415 openings at October 13the most recent data available, according to OhioMeansJobs.com, the state jobs website. This is the maximum in data going back four years and an increase of 28,767 job openings from the previous month’s reporting period.

Regional publications have also increased this year, reaching new highs for several metropolitan areas in 2022 on this most recent report. There were 69,433 job openings for the Columbus area, 52,840 for the Cincinnati zone and 100 712 for the Cleveland Region.

Even as job postings continue to climb, employers say they’re having trouble finding candidates for the positions they need to fill, and that includes start-ups.

“It’s still hard to find people in all fields. Startups are no exception,” Brickman said.

“There is a mismatch in the labor market (between) the skills and backgrounds that employers are looking for and the skills and backgrounds of the worker that are available,” Nationwide’s senior economist said. Ben Ayer said.

Although the demand for labor remains strong for now, he expects it to calm down in 2023 as the Federal Reserve continues to raise interest rates to fight high inflation for decades, he said.

“We expect all key labor market data to slow as we approach 2023,” he said. “The current pace of job creation and employer demand is unsustainable, especially given the Fed’s brutal tightening cycle and signs of slowing demand across the economy. “

Nationwide predicts a recession next year, but does not expect it to be as deep as the brief but powerful recession in the early days of the pandemic and the brutal Great Recession from 2007 to 2009.

“There will be pain, but it will be short-lived,” resembling what would be considered a more typical type of recession the US economy has experienced in the past, Ayers said.

The unemployment rate will likely rise by 2 to 3 percentage points — the WE rate was 3.7% in November, and the Ohio rate was 4.2% in October, (from ohio November unemployment report expected December 16) — with a peak rate late next year or early 2024, he said.

“The consensus is that we are going to slow down. The common fear is that the Fed is going to overreact,” said Marc Partridgethe C. William Swank Chair in Rural-Urban Policy at Ohio State University. “They’re going to push so hard they’re going to go overboard.”

Beyond Federal Reserve raise rates, so much uncertainty right now could affect the economy, whether it’s a change in the war in Ukraine or the fuel prices that soared earlier in the year, he said.

But any slowdown or recession is unlikely to change the long-term trajectory of the economy in the state’s metropolitan areas, he said.

Columbus’ population and economic growth, for example, should continue to shine after any slowdown relative to other metros in the state, as it has in recent decades, he said.

“What we have today is what we will have in the future,” he said.

Have startup valuations gotten too high?

Prior to going public two years ago, various reports pegged Root’s valuation at around $6 billion.

But once public, the stock plummeted, reflecting a company now worth around $100 million as he tries to strengthen his financial position.

While some of these startups’ valuations may seem high, Bricker said, that’s because they offer savings and value to other businesses and consumers.

Armstead said a company like Root is more visible to the pressure and tough decisions it has to make because it’s public. Olive, who is still private, makes some of the same decisions, but she’s not in the public eye.

“Both companies have investors and boards, and they’re pushing to control costs and focus on profitability, much like the much more established tech companies Amazon or Meta,” he said.

Even companies in the early stages of development need to show signs of getting their finances in order if they want to move to the next stage of funding, he said.

“We’re in a new era here – with big dollars, there’s big expectations, market-making expectations,” Armstead said. “These later startups in Columbus and through Ohio are fortunate to have great strategic investors backing them, but with all of these funds, at some point – and I think the time is right – earnings, returns and the positive fundamental economics of the unit are prudent and reasonable objective.”