RALEIGH – Revenue is challenged, cash reserves are dwindling, and more layoffs are just around the corner as the COVID-19 pandemic continues to wreak havoc on the economy. This is the bleak picture currently being painted for startups around the country in some reports.

But in North Carolina, the view on the ground, at least at this moment, is more nuanced.

“Honestly, it kind of runs the gamut,” says Jason Widen, founding partner at HQ Raleigh. “I’m probably meeting four companies a week. I have some companies that are doing really well; other companies that are in a wait-and-see mode.”

Out of HQ Raleigh’s 400 member companies, he can only cite two startups – both in the service sector – that are in more “dire” straits. A handful of others have asked for rent deferments. But apart from that, things look pretty good, he says.

“[I haven’t heard] of companies closing down, right and left. That hasn’t been the case. Obviously, some employees have been furloughed, and I’ve heard of people instituting cost-saving measures to be safe. Now, if you call me a month from now, that might change, maybe. But I’m cautiously optimistic.”

More layoffs predicted

To be sure, most analysts are forecasting a bumpy few months ahead. And entrepreneurs are reacting. Several Triangle firms landed federal Paycheck Protection Plan loans which provided needed infusions of cash. And the loans may be forgivable, especially if the companies keep their employees on the payroll.

In search for cash, startups find lifelines through crowdfunding, kickstarter

“We did institute a reduction in force in March before the PPP came into focus as an option for us,” Allison Wood of Da Vinci Ed told WRAL TechWire.

“Since we are a software company that was used to being distributed, the adjustment to working from home 100% was pretty easy for us compared to some other companies.”

But a PPP line has proven to be a lifeline to many.

“[F]ortunately this in addition to our active revenue is enough to keep our business going, and employees working,” says Monica Wood of Myxx Solutions.

Jay Bigelow, vice president of entrepreneurship at the Council for Entrepreneurial Development, says many firms seized on the PPP offerings.

“Almost every entrepreneurial company I have spoken with in last weeks has [or] was going to apply,” he says. “It felt very much like a land grab as everyone had heard “first in first served til the money runs out.”

However, with no end in sight for the COVID-19 crisis, the startup ecosystem is facing a serious capital crunch. Investment is “expected to drop significantly,” according to the National Venture Capital Association (NVAA) in a new report.

The U.S. VC industry started the year with about $120 billion in “dry powder” (capital available to VC investors to deploy to startups). While this represents a record amount of dry powder and is a strong position for the industry to enter a downturn, this capital “will not be nearly enough to blunt the negative impact of the COVID-19 crisis,” it noted.

The result: more layoffs.

Already, more than 385 startups have laid off around 44,000 employees across the country since March 11. Just last week, Uber said it’s cutting 3,700 full-time workers, or about 14% of its workforce, as people fearful of infection either stay indoors or try to limit contact with others to minimize risk when they do venture out.

Closer to home, a number of startups and emerging entrepreneurial companies in the Triangle area have also trimmed their workforces, including Durham’s SportsMedia Technology, which furloughed 35 percent of its staff in early April, and Greensboro’s Center for Creative Leadership, which laid off up to 120 workers. Cary-based Dude Solutions cut 20 percent of its workforce.

Wilmington’s Next Glass, parent company of Untappd, also confirmed layoffs to the WilmingtonBiz, though its new CEO, Trace Smith, declined to give numbers.

“This is likely just the tip of the iceberg,” NVAA said in the 17-page report.

One venture capitalist quoted even went so far as to predict 80 percent of startups will cut 10-50 percent of employees over the next two to four quarters.

Topping it all, cash reserves are running dry.

Startup Genome’s research on the impact of COVID-19 on tech startups – based on what they called the “first-ever global survey” on the topic, that has now been answered by close to 1,500 respondents – reveals that 65 percent of all companies, including 34 percent of Series A+ startups, have less than six months of cash.

But cash is available from investors

However, across the Triangle and North Carolina venture capital and investment cash continues to be available.

A biotech in Durham still operating in stealth mode is raising $5 million, for example.

Meanwhile, at least 20 companies have raised cash since April 1, according to SEC filings and media reports.

These range from unicorn AvidXchange – valued well above $1 billion now, the standard of unicorn status – to newly launched firms such as NextPlay Careers.

Durham’s Teamworks raised $25 million while biotech Kriya Therapeutics just landed $80 million.

What defines a startup?

Tom Snyder, executive director of RIoT, the Internet of Things users group based in Raleigh, has interface with “hundreds” of startups in the region.

He says there is a significant difference between companies that have reached a point of venture backing, and those that have not.

“My view is that layoffs are tracking much more to each company’s investor situation than directly to business performance — particularly for companies under three to four years old that are still really in the startup phase,” he said.

“VC-backed companies are under significantly higher pressure from investors and thus more prone to lay off employees sooner, as a means of protecting the investor’s cash. Similarly, public companies are showing considerable favor to support shareholder first and employees second.”

Most of the companies that RIoT works with are at an earlier stage, he added, and not under that investor pressure.

“Many are so early stage that founders were already working for free or significantly discounted salaries before COVID-19, so are less impacted from an employment level point of view,” he said.

Tales of a few

Indeed, some startups are reporting that to be the case.

Aeva Labs is an Internet of Things startup out of Raleigh that has figured out how to speed up the aging process of spirits with its software-controlled equipment.

Its co-founder Zachary Fearnside said, despite a few deals “go stale,” the company has seen no decrease in cash flow.

“Luckily enough, we’ve had no cancellations during the whole crisis,” said Fearnside. “We actually managed to close a deal on another distillery, and we’re installing in June.”

They also successfully applied for SBA’s PPPP and received the “maximum award.”

Zach Fearnside (Left) and Steven Guido (Right)

Still, plans to expand and hire two new employees have been put on ice.

“Good news is we aren’t a VC-funded startup,” he said. “We had a low burn before the crisis, and now we have the same burn. With our new deal closed, we’re looking at being funded for at least the next 12-18 months, perhaps indefinitely.”

Raleigh entrepreneur Jesse Lipson, founder of Real Magic and its Levitate relationship app, is also offering a positive slant, if slightly different.

His startup is backed by venture capitalists (it landed $6 million from a group of investors last June).

However, to date, there are no plans for layoffs.

“We are doing well,” he said. “We actually just made four job offers for May.”

WRAL TechWire photo

Real Magic founder Jesse Lipson.

Cofounders Capital, one of the most active early-stage startup investors in the southeast, is also going strong.

The Cary-based firm, founded and led by veteran investor David Gardner, has around 21 companies in its portfolio, including RewardStock founded by Durhamite Jon Hayes and Revibe Technologies.

“We have been lucky so far in that none of our portfolio companies is in immediate danger of running out of cash,” said Cofounder’s principal Tobi Walter. “Some of our companies, such as Myxx, WAAM, Feedtrail are even seeing increased demand.”

But he remains realistic.

“In a crisis and starting recession like this, we expect that a quarter or a third or so of our portfolio either already had to or will have to go through some layoffs; the government stimulus packages will help delay, reduce or even avoid those completely for some companies, but ultimately the question will be how quickly markets will come back.”