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Savvy investors, so the thinking went, wouldn’t worry about other companies merely because WeWork fell over.

The same point could be extended to and and other companies whose (at times) unprofitability made them less attractive than they had once been. (Lyft, as you recall, has worked to push back against the narrative with results and promises.)1

But all that might be wrong. A new post from well-known entrepreneur and venture capitalist draws a very different sketch of WeWork, its possible impacts, and where the market is today. We’re sharing two paragraphs (one early, one late) . Do read what’s below, and then make sure to of the original entry:

The topic du jour in tech right now is the sudden reappraisal of some high-flying startups based on unit economics/gross margins (e.g. WeWork, Uber, Lyft, DoorDash, Postmates, etc). […]

The public market’s verdict on WeWork and other gross margin-challenged companies has trickled down to growth and venture investors. Growth capital has seemingly tightened overnight. Winter is here. Founders should plan to be contribution margin positive by the time they raise growth capital — or at least be close to it, with a highly credible plan to get the rest of the way. Founders can no longer depend on an endless spigot of funding to defer tough business decisions.

Sacks wrote that yesterday, so the perspective is fresh.

Here at SA¹ú¼Ê´«Ã½ News, we’ve covered lots of positive signs in the startup market and the surrounding halls of capitalism. We’ve also noted some of the weaker signals. And that’s generated some mild chiding from industry participants.

But I can’t recall something this stark being said out loud in some time: “Growth capital has seemingly tightened overnight. Winter is here.”

Sacks does go on to say that his pronouncement, this window into the world of growth capital and its new expectations, is “not a bad development for our industry or for founders who want to build real businesses.”

Signs Of Winter

Signs of some issues in the late-stage market have cropped up in recent weeks. Three rounds of layoffs at recent IPO Uber were notable. WeWork is going to endure stiff layoffs as it seeks to right its own ship. , a car leasing unicorn backed by the Vision Fund, is cutting back on staff. So is .

What Sacks has done is make it perfectly acceptable now to be rather skeptical of the late-stage (growth, if you want) market in the world of private capital. Don’t trust me, trust him, and so forth.

So expect more winter watching from these pages of the coming weeks. There will be, nearly certainly, more cuts and retrenchments from some of the companies in the market who have raised the most, spent the most, and lost the most money.

To that effect, here are two recent such announcements:

• is , despite being one of the most . Regulatory pressure and self-inflicted wounds are throwing JUUL into choppy waters.
• Wag is at a price that will likely be a fraction of what the Vision Fund valued it at when it pumped huge sums into its coffers.

Lots of unicorns have great gross margins and businesses that can tack towards profitability or even cashflow breakeven. But some unicorns don’t, and according to Sacks the snow is already falling.

More when they tell us how they are doing.

Illustration: .

investment approach of putting large sums of capital to work at private companies, often providing them with fresh investment in the form of nine- and ten-figure checks is showing some weakness as 2019 begins to wrap up.

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Yesterday that , a Vision Fund investee, will “be laying off 40% of its staff [… and] removing its CFO, Tyler Painter.” A company doesn’t undertake a set of changes that painful in unison unless things have gone rather poorly.

Fair, a startup that helps consumers lease cars from their phones, has . Inclusive of debt financing, corporate and venture rounds, Fair has from investors like , , , , and along with both the Vision Fund and SoftBank itself, according to SA¹ú¼Ê´«Ã½ data.

But it is not alone in cutting staff. Fair has an innovative model — you can rent-buy a car for as long as you’d like under its model, and then stop rent-buying it when you desire — but that wasn’t enough to protect it from layoffs. The same could be said (notable business model followed by staff cuts) for a number of other Vision Fund-backed firms:

• : A highly-funded, on-demand dog-walking service that laid off . Stories have come out noting growth and operational challenges at the firm.
• : One of the Vision Fund’s largest bets, Uber’s three-part layoffs this year were big news. That the company was working to control costs as its growth slowed and its losses persisted wasn’t a surprise, but it did feel notable that a firm as wealthy as Uber was forced to go under the knife so late in its operational life.
• : The company’s impending layoffs aren’t the only time it has cut staff, but they should prove to be the sharpest cut. Estimates vary, but as many as 4,000 WeWork staffers could be fired in the coming months.

Three’s company and four is a horde, the cliche nearly goes.

So What?

This seems something like reality setting in for SoftBank and the startups it backs with ample cash.

There’s an illusion in Silicon Valley that if a company is pulling in giant fundraising rounds, they must be doing well. Just look at WeWork, its more than $12 billion it raised before it geared up to go public, and the mess that followed.

Raising huge rounds can be a a good sign, sure. It’s a sign of investor confidence in a company and some reassurance that the company will be around for a bit and hopefully do something productive with the money. But lots of venture capital doesn’t make up for an unsustainable business model (i.e.g high burn rates and no path to profitability), though it can help cover it up with a big budget for marketing and fast growth. Eventually, especially when a company slows growth, the economics of the business gets more attention and that’s when cuts happen.

SoftBank may be writing big checks like it’s not a big deal, but it isn’t doing it for charity. They’re doing it to make money in the long term.

But there have been reports that SoftBank CEO Masayoshi Son could pivot away from the firm’s current investing strategy and focus. reported that Son is considering shifting the Vision Fund’s focus away from rapidly growing startups to “companies with clearer pathways to profitability and public offerings.” With Son changing his tune, there could be fewer, smaller checks for startups and less means to grow fast.

It makes sense. No one wants to lose money on an investment, forget losing billions on multiple unprofitable companies. If Son and SoftBank go through with it, it will be hard to blame them.

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