In May, the venture capital firm Sequoia circulated a memo among its startup founders. The 52-page presentation warned of a challenging road ahead, paved by inflation, rising interest rates, a Nasdaq drawdown, supply chain issues, war, and a general weariness about the economy. Things were about to get tough, and this time, venture capital would not be coming to the rescue. “We believe this is a Crucible Moment,” the firm’s partners wrote. “Companies who move the quickest and have the most runway are most likely to avoid the death spiral.”
Plenty of startups seem to be taking Sequoia’s advice. The mood has become downright funereal as founders and CEOs cut the excesses of 2021 from their budgets. Most crucially, these reductions have affected head count. More than 10,000 startup employees have been laid off since the start of June, according to Layoffstracker.com, which catalogs job cuts. Since the start of the year, the tally is closer to 40,000.
The latest victims have been crypto companies, and the carnage is not small. On Tuesday, Coinbase laid off 1,100 employees, abruptly cutting their access to corporate email accounts and locking them out of the company’s Slack. Those layoffs came just days after Coinbase rescinded job offers from more than 300 people who planned to start working there in the coming weeks. Two other crypto startups—BlockFi and Crypto.com—each cut hundreds of jobs on Monday; the crypto exchange Gemini also laid off about 10 percent of its staff earlier this month. Collectively, more than 2,000 employees of crypto startups have lost their jobs since the start of June—about one-fifth of all startup layoffs this month.
The conversation around crypto companies has changed abruptly in the past year. In 2021, they were the darling of venture capitalists, who showered them with billions of dollars to fund aggressive growth. Coinbase, which went public in April 2021 at $328 a share, seemed to suggest an emerging gold mine in the sector. Other companies, like BlockFi, started hiring aggressively with ambitions to go public. Four crypto startups took out expensive prime-time ads in the most recent Super Bowl.
Coinbase was also focused on hypergrowth, scaling its staff from 1,250 at the beginning of 2021 to about 5,000 in 2022. “It is now clear to me that we over-hired,” Brian Armstrong, Coinbase’s CEO, wrote in a blog post on Tuesday, where he announced the layoffs. “We grew too quickly.”
“It could be that crypto is the canary in the coal mine,” says David A. Kirsch, associate professor of strategy and entrepreneurship at the University of Maryland's Robert H. Smith School of Business. He describes the contractions in crypto startups as one potential signal of “a great unraveling,” where more startups are evaluated for how well they can deliver on their promises. If history is any indication, those that can’t are fated for “the death spiral.”
Kirsch has spent years studying the lessons of past crashes; he is also the author of Bubbles and Crashes, a book about boom-bust cycles in tech. Kirsch says that the bubble tends to pop first in high-leverage, high-growth sectors. When the Nasdaq fell in 2000, for example, the value of most ecommerce companies vanished “well in advance of the broader market decline.” Companies like Pets.com and eToys.com—which had made big, splashy public debuts—eventually went bankrupt.
In today’s market, crypto startups are similarly exposed. “We could be seeing the collapse in that sector first,” says Kirsch.
Crypto advocates say it’s normal to oscillate between periods of exuberance and destitution, which the industry calls “crypto winters.” Chris Dixon, a general partner at Andreessen Horowitz, wrote about this cycle in 2020. When the price of bitcoin rises, people get excited, leading to more startups, projects, and people investing in the ecosystem. When the price of bitcoin plummets—as it did this year, to a fraction of last year’s peak—some of those startups disappear. But Dixon argues that the best of each cycle survives, leading to “choppy yet consistent growth” in the sector. (Dixon declined to be interviewed for this story.)
Kirsch isn’t as convinced that the sector can survive a more significant downturn. “It could be that the prior crypto winters were just small events in the end, because everyone involved was a true believer,” he says. Now that celebrities like Matt Damon and Tom Brady have brought more people onto crypto platforms, it will be harder for them to sustain growth. That could turn this crypto winter into something closer to a crypto ice age.
Still, entire sectors don’t tend to disappear, even after the bubble bursts. Plenty of ecommerce companies went out of business after the 2000 crash, but a few of them—like Amazon—continued to grow maniacally. Now isn’t the time to write off crypto altogether, but rather to watch how, and which, startups can evolve to meet real demand.
These challenges also won’t be exclusive to crypto. Instead, take that corner of the startup world’s struggles as a sign of the hard times coming for everyone else—if they’re not here already.
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