As experts predict another recession, European venture capitalists are advising start-ups in their portfolios to slash costs and freeze employment. Their Silicon Valley counterparts are doing the same.

Following a bumper 2021 filled with IPOs and huge fundraising rounds, several of Europe’s most valuable start-ups are suddenly cutting off significant numbers of employees and drastically reducing their expansion ambitions.

“The general advice is to extend [the] runway,” Michael Stothard, an early-stage start-up investor at Firstminute Capital in London, told CNBC. That means they either need to cut their costs or try to raise more capital if they’re able to, he added.

According to Nathan Benaich, a venture capitalist at Air Street Capital in London, the sector as a whole has been counselling companies to be more conservative rather than supporting go-go ambitions of the past.

“On my side, I think it makes sense to focus on what’s working in the business today vs. planning longer term bets until we get a better read on the market,” he told CNBC.

According to Fred Destin, founder of VC firm Stride, the advice given varies from start-up to start-up, but in general, he advises entrepreneurs in his portfolio to decrease costs wherever possible.

“Lower expected demand and slower funding markets really demand action” said Destin, who has led investments into European unicorns like food delivery service Deliveroo, property platform Zoopla and car retailer Cazoo.

There are indications that founders are paying attention to their investors, who frequently sit on company boards.

Klarna, the Swedish financial powerhouse that was valued at $46 billion last June and became Europe’s most valuable start-up, stated last week that it plans to lay off around 10% of its global personnel.

The buy-now-pay-later company, which employs over 6,500 people worldwide, is apparently aiming to raise new capital at a much lower valuation of around $30 billion.

In the fundraising industry, there is a paradox. According to data from the VC monitoring business Pitchbook, VCs have more capital than ever before, but they are cutting back their investments to observe how the economy evolves.

Oscar White, CEO and founder of travel tech platform Beyonk, told CNBC that this poses a problem for innovators who acquired capital at high valuations during the Covid epidemic and are about to run out of cash in the coming year.

“They are likely going to have to raise on a down round if we do go into a recession,” White said, adding that the guidance for portfolio companies from many VCs is to focus on capital efficient growth and aim to have runway through 2024.

“I’m optimistic we will continue to raise and be able to invest in growth because investing won’t completely stop,” White said, adding that it will just become more competitive.

With tech stocks plummeting in the first five months of 2022 and the Nasdaq stock market on track for its second-worst quarter since the 2008 financial crisis, start-up investors are warning their portfolios that they are vulnerable to the impact.

Y Combinator, which helped launch Airbnb and Stripe, stated this week that businesses must “understand that the bad public market performance of tech startups severely impacts VC investing.”

“It will be a longer recovery and while we can’t predict how long, we can advise you on ways to prepare and get through to the other side,” Sequoia Capital, the iconic venture firm known for early bets on Google, Apple and WhatsApp, wrote last month in a 52-page presentation titled “Adapting to Endure,” a copy of which CNBC obtained.

According to Hussein Kanji, a partner at Hoxton Ventures, European start-ups are only now getting the message.

“I think people only got the memo in Europe last week or the week before,” he said.

Elsewhere in Europe, the rapid growth of grocery delivery is coming to a standstill. Getir and Gorillas, two of the top fast grocery apps, revealed plans to let off hundreds of employees last week. Another company, Zapp, has announced redundancy in its UK employees.

(Adapted from CNBC.com)

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