The headwinds blowing at startups are increasing

by James · March 2, 2023

The headwinds blowing at startups are increasing.

After years of favorable investment and a macroeconomic environment that led to ever-higher valuations and faster revenue expansion, VC-backed companies must now expect a double shock of drastically falling prices and declining growth rates. (Try our new calculator to see how much these valuations might be affected by the fall in the growth rate.)

While some companies continue to grow rapidly, accounting data shows that revenue growth fell significantly in 2022 compared to 2021. This data comes from Kruze Consulting, which keeps the books and prepares taxes for over 750 seed through Series C startups.

Kruze used customers’ financial information to calculate an average decline across four sectors: software, e-commerce, healthcare and fintech, including crypto.

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Fintech is beginning to reverse course

The data, which Kruze exclusively shared with PitchBook, shows that worsening economic conditions affected all sectors, but fintech startups saw the biggest reversal in revenue growth.

Healy Jones, vice president of financial strategy at Kruze, said that after growing revenue by more than an eye-popping 500% in 2021, fintech companies started 2022 on a strong note. The rise in interest rates helped credit card companies and other lenders make more money from the additional spread they charged customers, and crypto startups were part of the boom in that vertical. While Kruze didn’t break out revenue changes for crypto- and blockchain-focused startups from traditional fintech companies, Jones said about 40% of the consultancy’s clients in the sector are crypto businesses.

While Kruze’s fintech clients grew an average of 70% in 2022, the sector’s revenue began to shrink towards the end of the year.

“The fallout from November to December was 25%. That’s significant,” Jones said. He added that while Kruze has yet to finalize all of its clients’ financials as of January 2023, preliminary analysis shows that the recent decline in fintech revenue looks set to persist.

While some credit card and B2B fintech companies are still doing relatively well, brokerages, robo-advisors, consumer-facing neobanks and especially crypto startups are experiencing significant headwinds, according to Rudy Yang, a senior fintech analyst at PitchBook.

The slowdown in fintech revenue growth is so widespread that it also affected retail darling Stripe. The payments company increased its gross revenue by 27% in 2022 – a significant decrease from 60% the year before, The Information reported.

Online shopping falls flat

Revenue growth in e-commerce also plunged in 2022. Kruze customers in this area increased sales by 84% in 2021, but the group’s revenue rose just 6% last year.

Jones pointed out that while some of the consultancy’s e-commerce clients are doing well, many are struggling. He said flat growth is akin to death in the venture capital world: Startups that fail to grow revenue are usually unable to raise additional funding.

The decline in e-commerce activity is likely a function of consumer cost-consciousness in light of a possible recession and a return to in-person shopping after the lifting of covid-19 lockdowns.

Business cost cutting challenges SaaS

SaaS investors expect their better portfolio companies to triple their revenue in their first two years of operation, and then double their sales in years three, four and five. Kruze data shows that SaaS companies doubled their revenue in 2021.

“It was phenomenal growth, which meant a lot of companies were on track” to meet investor revenue targets, Jones said.

But the sector’s sales growth fell to just under 60% in 2022.

Many companies loaded up on SaaS tools as they transitioned to remote work during the pandemic. But now companies are reining in these costs cancellation of underused licenses and applications. Meanwhile, the slowdown in traditional SaaS growth is being somewhat offset by generative AI companies that are starting to show “breakout” revenue growth, according to Jones.

Healthcare’s mixed bag

Healthcare is the only sector that is not strongly affected by the changing economic environment. Kruze’s health-focused clients increased revenue by an average of 23% and 22% in 2021 and 2022, respectively.

While the healthcare system is widely believed to be most recession-resistant sectorJones said a number of Kruze’s direct-to-consumer health businesses saw their revenue shrink or grow poorly in 2022.

Down or out

The decline in income growth means that companies will take even longer to grow into theirs valuations from the pandemic era. It may be possible for top performers or startups in categories that hold up better, such as SaaS. The challenge is to finance a money-losing company in the meantime.

Unless a company has many years of runway or its market value suddenly improves, it is likely on course for a downturn or a shutdown. Given the environment, the previous result might even be seen as success.