São Paulo — High-interest rates and political and social instability around the world are affecting startups and venture capitalists are now looking to adjust valuations. This is affecting hundreds of workers at Brazilian unicorns. In recent days, billion-dollar-valued tech companies QuintoAndar, Loft, Facily, and Creditas have made layoffs.
This Spring so far, QuintoAndar said it has laid off around 160 employees (4% of its staff). Loft, its main rival, valued at $3 billion, said it has laid off 159 people. Facily doesn’t reveal how many people were laid off, but a person with direct knowledge of the situation refers to at least 130 people laid off. Creditas, meanwhile, said it let go 11 people.
A culprit mentioned by founders and CEOs is the volatile interest rates, which makes funding more expensive for venture capital firms, especially for startups that don’t have a positive cash flow.
“We already knew that we would not have such low-interest rates, but our surprise was how fast the market turned, as governments accelerated the interest rate increase,” Diego Dzodan, CEO of Facily, told Bloomberg Línea.
Another factor for laying people off, executives say, has to do with geopolitical reasons and global economic trends, something that takes a toll on operations by venture capitalists as well as their portfolio firms. Other reasons include macroeconomic issues, such as high inflation, the devaluation of the dollar, and the war in Ukraine.
In consequence, VC funds may find the arguments to pull out of commitments.
One person affected by the dismissals at Facily told Bloomberg Línea, on condition of anonymity, that a month and a half ago Dzodan, reportedly said that the investor who had committed a round was walking out from the investment.
“Last year, Facily went from 20 to 300 people. Now, about 200 have been laid off,” the person said.
In turn, Dzodan says that no specific fund would have already committed the investment, but that at this moment the entire market has “much less interest.”
“We had four funding rounds last year. We always have to evaluate scenarios. At the end of last year, we imagined 2022 with a scenario that could keep coming more rounds, assuming that the conditions of last year were maintained, but from the first days of January it became clear that the market was changing very fast and the availability of funds for that type would be much smaller. We adjusted our expectations,” Dzodan said.
Cash to burn?
Startups don’t always generate cash or turn a profit. Most of the time, the companies of the so-called “new economy” bet that the investor will have more patience and can wait longer to be paid, as pointed out by Bruna Losada, in her book “Finance for Startups”. But it does not mean that a company does not need to generate cash. It will have to generate cash one day, and, due to the investor’s patience, it will have to remunerate him well. A classic case is Nubank (NU), which only generated a profit last year. Before that, the most valuable fintech in Latin America was in the red.
Unicorns like Nubank and QuintoAndar are regarded as great success stories among startups. The proptech is valued at $5.1 billion, much on account of its billionaire contributions and an operating margin that guarantees investors a good view of the company’s future.
Quarterly, QuintoAndar has reported revenue growth; however, persons with knowledge of the matter said that one of the main reasons for the layoffs was management focused on investment funds and lack of planning.
But, according to Gabriel Braga, CEO and co-founder of QuintoAndar, at the beginning of the company it was difficult to attract investors and a lot of effort was made to run the startup without cash spikes. But since 2018, the scenario has changed. QuintoAndar captured its C Series with General Atlantic, its D Series with SoftBank, and last year it had two rounds.
“It is part of companies to know how to navigate these fluctuations in the capital market,” Braga said. “We don’t exist because we have an investor, we endure even without an investor. 2021 was the best year for Latin America and this year we will have an adjustment worldwide and we will see that over the next few months. I don’t think investments will disappear, but it will reduce the euphoria of available capital a bit. We don’t need money today, we weren’t thinking about any short-term rounds, but we look at this as one of the information on our radar.”
Numbers and data
Facily is a social commerce startup founded in 2018 that promotes group shopping. A person directly affected by Facily’s cuts told Bloomberg Línea that since late last year the company had negative cash flow. “But Facily turned unicorn, which reassured everyone,” the person said. According to this person, Facily’s mistake would have been to attack several fronts at once, including the marketplace and fintech.
In February, the company reportedly froze promotions and new hires.
Then, the startup would cut third-party contracts and started firing people outside the technology area. “They had promised that no one from the tech team would be laid off, but almost 70% of the tech team was laid off, we estimate about 200 people,” the person said.
Dzodan told Bloomberg Línea that the decision for the layoffs was made in the context of funding for startups.
“Before, I had a lot of money to invest in companies like Facily. Now there is not so much money for companies like ours. In a context that has less money, the right thing to do is to preserve the company’s cash. This ends up reducing expenses, such as this reduction in the team.”
2021 was the year Brazil had the most investments in startups. Last year, Brazilian startups received $9.4 billion in investments in the year, double that of 2020, with cumulative growth of 755% in five years, according to data from Distrito.
According to a person familiar with the funding situation at QuintoAndar, “the VC market was full of money. It was overflowing. If you present a minimum of economic viability for a company, you would get a contribution.”
The person, who preferred not to be named as the discussions are private, said QuintoAndar received billions in funding because the firm was growing, albeit with trouble.
“It’s growing without governance, disorderly because it does not have this type of planning. They end up pulling many projects out of the hat and many projects go wrong, many do not give a return, and they have to move on to a new project because there is no governance, and no control to provide security for investors. If you do not give security to investors, you have to adjust the margin, and it’s the people who suffer, they are sent away.”
Braga, QuintoAndar’s CEO, argues that the startup is an agile company, in constant evolution, and that it is part of the process to prioritize a project that worked better over another, making adjustments in the allocation of money and people. “Our intentional planning process is not static; it’s not going to be the same plan for five years. It’s not amateurish or lack of professionalism, it’s just an inherent consequence of what we propose to do, which is to innovate and grow fast.”
Expansive VC, expensive money
Fernando Moulin, professor at INSPER and expert in business, digital transformation, and customer experience, says that macroeconomic conditions are the main reason for the layoffs of these startups, as the market anticipates the movement of interest rate increases by central banks. Investors demand a fair return on their equity and investing in very fast-growing technology businesses are cash-intensive businesses that generate a potential future profit outlook.
“With venture capital money becoming more expensive, investors tend to push for governance adjustments and question the soundness, whether the business is worthwhile,” he explains. “However, if you’re too worried about managing internal processes, you’re missing out on the expanding market. And if the market grows at a 10% rate and you grow at 8%, you miss the check.”
One of the people heard by Bloomberg Línea said that QuintoAndar’s problem is that the company has not been able to show the margin that investors expected because it lacks governance in projects, which are done on “trial and error”. Therefore, the quickest way to increase margin for investors and reduce costs is to lay off.
At SoftBank, one of QuintoAndar’s biggest investors, the feeling is different. According to Eduardo Vieira, SoftBank’s communications leader for Latin America, the Japanese conglomerate did not impose any restrictions, nor did it take its foot off the accelerator on any investment by the Latin American portfolio companies.
“The companies in our portfolio in the region are growing very quickly and it is normal for them to have adjustments, and this does not necessarily have to do with the macro picture. We see many of these companies in our portfolio with open positions. Strictly speaking, there is no direction from us for any company in the portfolio to take their foot off the accelerator in Latin America,” said Vieira.
The pace of business decisions at the funded firms, however, apparently leaves no space for planning and it’s a more ‘do-as-you-go’ corporate culture. At QuintoAndar, this was the perception by a person familiar with the matter.
“Meetings with the board of investors are generally held quarterly, so the view is quarterly. By the time you are about to have to put together a report for investors and you don’t have a decent long-term plan, you have to show a result. The way you can show a result at the time is by growing revenue and increasing margin or increasing margin and taking cost out. When you cannot grow revenue, even because there is a very strong competitive market against QuintoAndar with other competitors emerging, what do you have to do to show a result to the investor? Take the cost out,” the person told Bloomberg Línea.
Braga explains that QuintoAndar looks at margins for investors with attention and awareness in a process of weighing growth and profitability.
“It’s not a matter of showing margin to the investor, but of the trade-off of what we look at more for the business at that moment. There are times when the scenario is a little more adverse and you preserve some cash. We have a group of privileged investors, but we are the ones who run the business. Investors support us, but there is no short-term influence on the directions to be taken. I don’t feel pressure from how we manage margin against growth, I feel support and confidence in the trajectory we’ve been taking”, Braga told Bloomberg Línea.
First, acquire; then, fire
Two persons heard by Bloomberg Línea who were directly affected by the dismissals at QuintoAndar said the financial problems at the startup began after the acquisition of real estate firm Casa Mineira in March 2021.
“Since they made that acquisition, some things started to change. Benefits were taken away, brokers’ commissions were reduced,” a former employee said.
According to this person, targets started getting harder to beat or meet. Another person said that QuintoAndar did not have the return expected with acquisitions. Besides Casa Mineira, QuintoAndar recently bought Noknox and Navent.
But, according to Braga, Casa Mineira was the most relevant acquisition that the startup has ever made. “Since we made this acquisition, we have intensified our leadership in Belo Horizonte, we had a record quarter for QuintoAndar with Casa Mineira. We more than doubled the conversion of our leads with this acquisition. We are evolving to bring realtors to be our partners within the platform and Casa Mineira was a pioneer in this in Belo Horizonte. As for the most recent acquisitions, everything is evolving as we imagined.”
Redundancy hurts too
In an interview with Bloomberg Línea, Loft co-founder Mate Pencz said almost 160 layoffs were due to the purchase of CredHome. With the merging of the teams, Loft laid off employees in the credit area. About 60 people were relocated internally, according to Pencz.
Pencz says that with high-interest rates, the company has seen a slowdown in the mortgage market since the end of last year. “The high-interest rates have impacted some segments of the property market, but overall we have a growth trend with more transactions happening in the first three months of this year compared to last year.”
He says Loft can work in partnership with real estate agents, which creates lower incremental costs for the startup. “Depending on the business model you operate, you end up being more efficient and have less need to carry the cost in-house. In recent years, the sectors have been consolidating. I imagine that after this wave of consolidations that have occurred in the last few years, this year we will go through a phase of managing those acquisitions. This does not mean that there will be more layoffs in the market, but I think that these companies, for their size, are increasingly able to be more efficient,” he said.
For Pencz, a period of high hiring, consolidation, and phases of greater efficiency gains are part of the trajectory of technology companies.
Since February, some employees of QuintoAndar already knew that their areas of operation would be cut, and the company had offered the possibility of relocation for these employees. Some were relocated – those with the lowest salaries, according to the interviewees – others were neglected in the relocation process and ended up fired. According to former employees, QuintoAndar’s salaries are high, compared to the market.
One of the areas affected by the cut was real estate sales, which would be replaced by the on-site poles that QuintoAndar opened together with Casa Mineira. In these poles, employees would be outsourced, generating fewer costs for the company, according to information from former employees.
But, according to Braga, the area of buying and selling real estate “exceeded expectations”. “The hubs in the models that Casa Mineira already had increased the number of people who are with us, the partner brokers. It generates redundancy, but it is not a direct relationship. We incorporated a learning experience that allowed us to scale up buying and selling in other cities faster. Our acquisitions are complementary.”
Valued at $4.8 billion, Creditas also had layoffs. In a press statement, Creditas said the only area that had internal adjustment was the office and physical space management team, with a reduction of 11 people due to the adoption of the hybrid working model. “We are currently using only 15 percent of the capacity of our physical spaces. Our workforce remained stable during March and April this year, totaling over 4,000 employees. We are continuing on a fast pace of revenue growth and project growth in 2022 of more than 2x,” it said.
All former employees of QuintoAndar heard by Bloomberg Línea reported a lack of care for employees and internal facade cultures, which in practice are not followed. “The way it all happened was quite impersonal,” said one of the interviewees.
“I think it was a failure of planning. They aimed at the marketing campaign in Big Brother Brazil and didn’t achieve the goal,” said a former employee.
It was not the first time that QuintoAndar bet on Big Brother Brazil to highlight its brand. In 2021, the startup also invested in advertising on the show and repeated the strategy this year.
According to Braga, the investment in the program generates opportunities for the entire company. “There’s no such thing as investing a little here and having to cut on the other side. Our workforce needs to invest in growth to generate opportunities. We had results with the repercussion of our brand on social networks.”
QuintoAndar would only have mobilized to help laid-off employees with recommendations for new vacancies after a spreadsheet with the names and functions of those laid off went viral on LinkedIn. “I think the way everything was conducted was misaligned with the values that the company preaches. Some employees are on holiday and have received a resignation email. Many of the people sent away are mothers. It could have been done in a slightly more humanized way.”
Braga replies that QuintoAndar has a fondness for its employees and that the company has a culture that is very focused on customers and on embracing the new. “Change and adaptation are inherent to who we are. We seek high performance, efficiency, that’s why we stretch goals, and propose different challenges, not everyone adapts. Even if we have all this affection, it may be that the interpretation of how someone left was not perfect. We also step on the ball, we are not perfect. We try to be agile and look for the discreet way to help with the relocation with friendly companies.”