As economists debate whether recent bank failures, high inflation and other factors signal an impending recession, it's a topic the travel tech community is following closely.
Two industry CEOs – Workbnb co-founder Yeves Perez and Cloudbeds co-founder Adam Harris – shared their views on the wider implications of the regional bank failures and their own experiences with two failed banks, Silicon Valley Bank and First Republic. And they offered advice to people hoping to launch startups in this challenging funding climate.
“With banks collapsing, it is causing further constraints on the ability to fundraise because venture capital is putting a freeze on discussions,” Perez said. “So if you’re lucky enough to get a meeting and go through this process, anybody will tell you it takes about six to nine months to raise almost anything.” He added that this could be the first generation of startups that could need 12 to 18 months to raise.
Venture capital firms, Perez said, often pressure startups to pursue a high-growth strategy and take a loss for a couple of years, so he has turned to angel investors for survival.
Subscribe to our newsletter below
“People ask me, ‘Are you worried?’ And I tell them, ‘As long as I have my believers and I’m focused on my niche, I can raise from them and continue to grow and thrive.’”
Perez said Workbnb has put in “two solid years” of client discovery, building relationships with future customers and building the product and is on track to have $26 million in bookings next year. Founded in 2021, the Las Vegas-based software as a service company provides housing for people traveling for work.
Workbnb is part of Techstars, a pre-seed investment company that provides early-stage startups with access to mentors and capital. Because it had a strong relationship with Silicon Valley Bank, Perez initially opened an account there. But when he asked the bank about establishing business credit, he considered it a red flag when his emails went unanswered.
When Perez arrived in Oklahoma last year to participate in Build in Tulsa, a Techstars accelerator supporting Black-owned businesses, Build in Tulsa paired his co-founder and him with Regent Bank. The Oklahoma-based bank didn’t just give them accounts, but educated them on how to use their savings for taxes and payroll, and it readily issued Perez a secured credit option to get started.
“It was a total 180-degree experience,” he said. “I was like, whoa, this is the kind of support I need.”
Perez moved his money from SVB to Regent Bank, which is part of a network of IntraFi banks and can insure accounts into the millions, he said.
The startup has found a lifeline in real estate investors who want to have their properties displayed on the Workbnb platform.
“It makes sense for them because when they look at the valuation, they’re not looking at getting paid once out of a payout when we go public,” Perez said. “They’re looking at it as, ‘Well, I’m also making revenue from your technology. So I’m getting paid twice.’”
“Have as much runway as possible”
The day of the SVB collapse, Cloudbeds CEO Harris transferred all but $1 million of his company's money to JPMorgan Chase, where it already had an account.
“So we were very ahead of the game in that we got 99% of all of our money out,” he said. “We could rest easy that weekend,” while many founders fretted about possible financial losses.
“Our big fear was, ‘What else is out there? What is this really covering up?’” said Harris, who recently asking his LinkedIn network to vote on which bank might fail next.
Capital is still flowing. It’s just much more selective. It’s much more slow-going.
Adam Harris - Cloudbeds
Founded in 2012, Cloudbeds provides cloud-based hospitality management software across 157 countries. Harris is adamant that the Federal Reserve must tame inflation.
“If money is not flowing and liquidity is not unlocking … these funds are going to be very hesitant to deploy in an environment where they’re already feeling pressures,” he said.
“Capital is still flowing. It’s just much more selective. It’s much more slow-going.”
While Cloudbeds previously completed deals in six weeks, it might now take four months.
Harris’ advice for founders hoping to launch a startup now?
Do risk calculations by dividing your estimated net profit by the maximum price if the risk doesn’t work out. Be incredibly disciplined if you are raising money. Have as much runway as possible. The rule of thumb has always been to have 18 months of runway on your balance sheet, but it’s now 36 months or longer, Harris said. Control all the things you can control, such as generating revenue or saving money. Rules one, two and three of leading a startup are “never run out of money,” he said.
Harris still keeps Cloudbeds’ operational day-to-day savings with Silicon Valley Bridge Bank - which he calls “the safest bank in the world right now.” And the global travel boom gives Harris reason for optimism.
“We’re talking about one piece of the bigger economy,” he said. “I would caution that travel is killing it right now. We are back to 2019. … Even though there are some scary economic woes, there’s some really bullish tailwinds in our industry.”
Phocuswright Europe 2023
Some of Europe's smartest investors share their views on the state of startups and how to pick winners for travel’s next era.