Next-generation Googles run a tighter ship

The slump has hit younger firms hardest of all. Rising interest rates make upstarts’ promise of rich profits far in the future look less juicy in the here and now. As a result, venture capitalists are stinting. Globally, venture-capital investment in the first half of this year was $144bn, less than half of the $293bn raised by startups in the same period in 2022. Companies that do manage to raise funds are seeing their valuations squeezed. According to Carta, an equity platform for startups, in the first quarter of 2023 almost a fifth of all venture deals were “down rounds”, where companies raise capital at a lower valuation than before. The valuation of Stripe, a fintech star, fell from $95bn to $50bn after its latest funding round in March.

That is forcing aspiring Alphabets and Metas to follow their role models in rethinking some of the habits acquired during the years of easy money. Efficiency is the talk of Silicon Valley. Companies accustomed to spending with abandon to win market share are finding themselves in the unfamiliar position of having to trim fat. And there is plenty of fat to trim.

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A good place to start is payroll. Battle-hardened founders grumble that salaries are the biggest expense for young firms. In July startup job postings on Hacker News, a news site for coders, were down by 40% compared with the same month last year (see chart 1). The average startup is already looking leaner. Numbers from CB Insights, a data provider, show that the median number of employees at young firms has been steadily declining. In 2018 the typical firm that raised a total of between $10m and $25m had around 50 employees. In 2023 a similar one would employ 41. It is a similar story for larger startups, all the way to late-stage firms which have raised more than $500m (see chart 2).

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In the go-go years firms hired lots of people who did not have that much to do. Not anymore. Most startups, points out Tom Tunguz, a venture capitalist, can run with smaller teams, with a negligible impact on revenues. Tech firms are, naturally, embracing artificial intelligence (AI). An AI “co-pilot” on GitHub, a Microsoft-owned platform for open-source programs, improves coders’ productivity by 30%. And it is not just the geeks who benefit. Other employees use AI-based tools, from chatbots like ChatGPT that churn out emails for marketers to clever software that improves sales efficiency. One founder of an early-stage startup with fewer than ten employees estimates that AI has already boosted his company’s productivity by 30-40%.

The austere spirit is visible even among one of the few categories of startup that is unaffected by investors’ newfound stinginess: those which develop all the AI tools. Anthropic, a firm founded by defectors from OpenAI, which created ChatGPT, has raised $1.2bn with 160 employees. Adept, a company started by former employees of DeepMind, an AI lab owned by Alphabet, has raised $415m with 37 employees. Compare that with darlings of the previous startup boom. Klarna, a Swedish payments firm that experienced wild growth in the go-go years, had 2,700 employees by the time it raised $1.2bn. Databricks, a database-maker, had a staff of 1,700 at a similar stage.

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