Pink Slips to Pitch Decks: Laid-Off Tech Workers Roll The Dice In Iffy Funding Market To Start Their Own Companies

This is the first in a four-part series featuring workers displaced by the recent waves of tech layoffs who used the transition to found their own companies. Today we chat with investors and founders and look at the data for early-stage startups. Also read about laid-off tech workers founding fintech and legal tech startups, and the role of accelerators amid the layoffs. — Special Projects Editor Christine Kilpatrick

CoFoundersLab is serious about helping workers caught in the tech industry’s mass layoffs. 

The entrepreneur networking and skill-building site is offering free premium memberships to laid-off tech employees. “F’ Da Man,” the website says. “You’ve built it for them. Now build it for yourself!”

Close to 140,000 workers at U.S.-based tech companies have been laid off in mass job cuts so far in 2023, per Crunchbase’s Layoff Tracker. The industry continues to reel from falling valuations, rising interest rates, a shuddering economy and troubles in the banking sector. Many large tech companies are also contending with shifts in consumers’ online behavior post-pandemic and paring their bloated employee rolls from years of frenzied hiring.  

But some of those pink slips spell opportunities for wannabe entrepreneurs as well as the startup networks and investors eager to help them. Despite a challenging funding climate, many see potential in the high-quality talent being cut loose from major tech companies.

“We’ve got some amazing people who are incredibly sophisticated and have worked for a lot of big FAANGish companies,” said CoFoundersLab investor and chair Steve Lehman. “They’ve decided they built enough for billionaires and want to kind of do something on their own.”

Programs like CoFoundersLab’s free memberships benefit networks and investors as much as the recently laid-off workers, Lehman said. Founded in 2016, CoFoundersLab serves about 650,000 entrepreneurs looking for co-founders and partners as well as mentors, along with additional business training. 

“We didn’t look at this as a philanthropic gift,” Lehman said. “This was a win for the founders because they could immediately come in and engage without restrictions. It’s a win for us because we get super-bright people onto the platform.”

The immediacy is important, Lehman said. “Ideas are not as fundable as they used to be. Sure, I think investors, particularly in seed to series A, are looking for something a little more tangible where the wheels are already on the bus. It doesn’t have to necessarily be rolling down the highway yet, but it’s got to have good momentum with unique value propositions.”

Masha Bucher, founder and general partner of early-stage investment firm Day One Ventures, understands the risks and rewards for laid-off tech workers trying to found their own companies. Bucher started her first and second companies after being laid off from previous jobs. 

“I had this idea when I saw lots of great talent being laid off from companies like Stripe and Twitter. When I saw an experienced project manager leaving Twitter or Stripe, I rushed to check what was next for them,” Bucher said. “I figured that even if it’s 0.1% of all people who were laid off, these people could make it into great founders.”

In less than two weeks, Day One received more than 1,200 applications for its “Funded Not Fired” program, which offers to invest $100,000 into selected startup ideas. Half of the companies submitted were already established entities. The firm will also lead a $1 million seed round for the top companies in the program. 

In reviewing the applications, Bucher noticed some patterns among the laid-off: Some came from companies that had raised a Series B round and hired accordingly, but could not raise enough after that and had to start layoffs. Others had worked at companies that had hired great talent to build innovative things, but then decided to return to their core revenue streams and channels. And finally, there were recent university graduates who were hired, then laid off. 

With so much great talent in the laid-off ranks, Bucher saw no reason not to embrace this group. “Great entrepreneurs shouldn’t come from a particular background. It’s not defined by universities or business background, or nationality or gender. If they can make it now, they can make it in the future.”

Early-stage funding in the U.S.

Of course, making it these days will be tough enough. Entrepreneurs of all backgrounds and skill levels are facing a challenging funding environment. 

Venture and growth investors in private companies worldwide continued to scale back their investment pace in the first quarter of 2023, per Crunchbase data. Global funding in the first quarter reached $76 billion — marking a 53% decline year over year from $162 billion in the first quarter of 2022. Even at the earliest funding stages, investors are pulling back.

The story for early-stage U.S. startups is similar. Seed and angel investment to U.S. startups reached $3.1 billion in Q1 2023 — a 45% decline year over year from the quarterly peak of $5.6 billion in the first quarter of 2022. 

Running against the wind 

In such an uncertain environment, even well-known and well-connected entrepreneurs struggle to raise their first round. 

Dereck Tatman was the CEO of the now-defunct Global Genome Center, a startup aimed at establishing DNA sequencing centers in low- and middle-income countries. When the company’s expected government funding fell through, Tatman spent six months scrambling to modify the business plan and find traditional biotech investors to fill the gap. It didn’t work out.

“[Biotech] is just a very capital-intensive business, and when you’re talking about needing a couple more hundred million dollars just to make data start to come out, it scares most investors off,” Tatman said.

Indeed, startups in the biotech and medical space often operate on a different timeline than most sectors in tech. Not only do they need a physical lab or manufacturing space, they also take as long as a decade to weed through strict regulations from the Food and Drug Administration to get approval. The process is costly.

When Global Genome Center shut down in November 2021, Tatman and his co-founder Ron McCullough quickly created a new company: Intrigue Health, a stealth-mode medtech company incorporated the following March.

Intrigue Health is creating diagnostic testing products that can be used at home. It’s a rapidly growing space that saw favor during the COVID-19 pandemic, when new investors flooded the health care sector. 

Now the funding market feels more like 2018 and 2019, Tatman said. Given how expensive and slow-moving innovation in the biotech sector is, funding is often siloed to investors who have long been entrenched in this space. 

As 2023 continues, there are few signs of a reversal in the year’s steady trends of rising layoffs and falling VC investment numbers. When we asked Tatman when he was hoping to raise his first round, he laughed and said, “I would have hoped by now.”

— Crunchbase News’ Senior Data Editor Gené Teare and reporter Keerthi Vedantam contributed to this report. 

Illustration: Dom Guzman

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