What happens to trendy startups when funding dries up?

Are the days of free cash flow for startups finally over?

After more than a decade of investors pouring money into seemingly any new company, profitable or not, many now appear to be pulling out as interest rates rise to stem soaring inflation and the global economy suffers all kinds of turmoil.

Tech companies are already starting to feel the pinch. Buy now, pay later player Klarna, which became Europe’s most valuable startup, slashed its valuation as it seeks new funding, According to Bloomberg. Thrasio, an aggregator that acquired third-party sellers on Amazon, failed to list on schedule and was forced to lay off staff and scale back on new projects. The Wall Street Journal reports.

“If your plan is to raise funds in the next 6-12 months, you may be raising funds at the height of a downturn,” Y Combinator, a prominent Silicon Valley tech incubator, said in a letter to founders Acquired by Tech Crunch. “Remember that even if your company is doing well, your chances of success are very low. We recommend that you change your plans.”

Sequoia Capital offered founders an equally pessimistic outlook, calling it a “moment of truth” in a presentation Seen by The Information.

The prognosis doesn’t look good for fashion tech companies, or indeed most fashion startups. How worried should they be?

The answer may depend on what they did, and whether they were “alive by default” or “dead by default.”

concept from An article from 2015 Written by Y Combinator founder Paul Graham.

“When I talk to a startup that’s been in operation for more than 8 or 9 months, the first thing I want to know is almost always the same,” he wrote. “Assuming their spending remains the same and their income growth is at the level of the past few months, will they be able to use the money left to make a profit? Or more exaggeratedly, are they alive or dead by default?”

Over the years, numerous default-dead companies have survived due to the abundance of available funds. In its recent letter to founders, Y Combinator suggested that those who don’t have a “live to default” runway raise as much money as possible. But it’s a task that’s looking increasingly difficult.

Citing PitchBook data, Wall Street Journal Note that after hitting an all-time high in the fourth quarter of last year, VCs are starting to pull back.While PitchBook’s own research found that deal sizes and valuations U.S. and Europe It has yet to follow suit during this period, likely because the recent price drop in the public market took several quarters to reflect in the private market, it said in a note. Research Notes.

“Venture capital (VC) is particularly vulnerable to repricing because of its high exposure to young companies that need significant growth to become profitable, and the surge in valuations over the past few years,” it said.

What does this mean for fashion?

It’s impossible to know exactly where investors will be placing all their bets, but in 2021, among those attracting capital In the fashion tech space, there are companies that can better connect sellers and buyers online, solve operational pain points, and make shopping more appealing. Investors are also starting to do their homework on Metaverse and web3-related businesses to see where to put their money. If the campaign is any indication, a tech solution could be of more interest than another unprofitable direct-to-consumer brand.

Recent deals seem to be pointing in this direction. Bold Metrics, an AI-powered fit and sizing company, announced today that it has raised $8 million in funding. ZMO.aiwhich creates AI generative models that can be used in e-commerce, and more recently Raised $8 million. Shopping Video Company Firework . Raised $150 millionSoftBank leads.

However, all fashion startups should expect investors to become more discerning in the coming months. Many may need to cut spending, pause hiring, and make their balance sheets look as healthy as possible.

The “buy now, pay later” option won’t disappear from the checkout page, as Klarna has experienced a dip, just like other changes brought about by the tech boom of the past decade won’t go backwards. Funding won’t dry up completely, either. There will still be people willing to invest in companies they believe in.For example, Andreessen Horowitz just announced a new $4.5 Billion Crypto Fund. Many venture capitalists believe that downturns are when great companies are born.

But businesses that are already self-sustaining are more likely to survive and find supporters to help them grow. Others may want to act now and get as close to that place as possible, or they may find themselves struggling to find the funds to keep going.

Read more from BoF technical correspondent Marc Bain, Sign up for our weekly technical briefing Get out every Thursday to discover how blockchain, artificial intelligence, 3D, extended reality and other innovations will change the way fashion businesses design, manufacture, distribute, market, sell and resell their products.