Following a whirlwind of “overblown” panic that arose due to what seemed like the sudden demise of Silicon Valley Bank (SVB) on Friday, March 10, Cara Whitehill, founder of Unlock Advisors, an angel investing and advising firm for growth-stage startups, said professionals and institutions, including various early stage companies in the hospitality industry, are breathing a sigh of relief.
The widespread worry Whitehill observed – exacerbated by the speed of social media – appeared to simmer after the Treasury, the FDIC and Federal Reserve announced emergency actions to backstop SVB deposits on Sunday, March 12, ensuring all depositors would have full access to their funds the following day.
While SVB’s collapse may not have a significant impact on the hotel industry at large, early stage companies in the sector are facing the threat of decreased funding by venture capitalists and other investors following the pandemic.
According to Chris Hemmeter, managing director at venture capital and private equity firm Thayer Ventures, SVB’s collapse caused “very little impact on the hotel industry, aside from anxiety and distraction,” noting the firm is seeing engagement and offers from competing providers and expects most of its startup companies will replace SVB services quickly.
Two Thayer Venture companies had significant exposure to SVB and initially were concerned about accessing funds to make payroll and pay critical operating expenses. However, those companies are working through replacement services and evaluating offerings – with time on their side because of the federal regulator’s emergency actions, Hemmeter said.
The collapse also will likely not have an impact on the relationship between startups and venture capitalists, which is “one grounded in a powerful common interest to build enduring companies,” Hemmeter noted.
However, one challenge early stage companies are facing across the board, including in the hotel industry, is the continued tightening of VCs’ and other investors' purse strings.
In today’s climate, mid- and late-stage companies are seemingly benefiting the most, as funding continues to move later stage. According to Phocuswright’s The State of Travel Startups 2022 report, Series A companies raised $1.1 billion in 2021, while Series B ($1.5 billion) and Series C ($1.8 billion) companies took home the majority of funds.
Due to a rising interest rate environment, investors have become increasingly cautious about where they’re placing funds, Whitehill noted.
Hemmeter has observed this trend progress over the last year and says the caution includes deeper analytical thinking and verification during due diligence – with investors prioritizing unit economics and go-to-market proof points. It also includes a substantial reweighting of priorities toward capital efficiency and away from growth at any cost.
“VCs want to see a path to profitability and fact points that support that path. It might be a long path, but a path must be there,” Hemmeter said.
This caution could cause rifts between investors and early-stage companies, as founders will have to accept longer financing cycles and will be pushed toward cash efficiency, Hemmeter said, adding, “the relationship might feel more constraining to founders.”
While fewer investors taking on risk could potentially threaten less developed early stage companies, Hemmeter said the trend is healthy for the marketplace – rewarding and promoting the long-term growth of startup companies with solid business fundamentals.
