The pandemic-hit period has been a dream run for startups, especially those operating in the digital playground. This trend has changed significantly over the past three to four months with the sharp sell-off in public markets, particularly in technology stocks, as it has raised concerns about the valuation of some startups
A total of 21,121 employees at tech startups have been laid off in recent months, compared to 5,892 in 2021. — File photo
By Shailesh Dash/Industry Insight
Released: Sunday, June 5, 2022 at 4:08 p.m
2021 was a year of extremes – of the increase in the money supply [between 2019 and 2021] and low interest rates to the highest inflation rate of 7 percent in 40 years and record valuations for financial markets, both public and private companies. Much has changed in the past four months alone, notably inflation, which has continued to rise, coupled with the increasingly dovish tone of central banks.
Additionally, public stocks sold off, particularly high growth and technology stocks, on anticipation of a slowdown in economic growth and tailwinds in earnings. These factors have now passed to private companies in the form of their ability to continue growth and justify valuation premiums. The first signs of this are already visible as the focus shifts to rationalizing costs and optimizing operational efficiencies to prepare for a challenging economic environment in the near term.
2022 got off to a jittery start as investors were concerned about rising inflation, yet remained neutral on future prospects and central banks’ ability to take the necessary steps to bring stability. However, central banks’ continued failure to provide clear direction and the rising pace of inflation have left investors wary of growth prospects and the possibility of stagflation.
Added to this was the start of the conflict between Russia and Ukraine, which led to record increases in oil prices and other commodities and increased inflationary pressures to reach record levels in the latest figures. As a result, markets saw strong selling pressure in high growth companies, particularly technology stocks, which later spilled over into the broader financial markets.
The shift in sentiment in financial markets has been evident over the past few months, particularly selling pressures in technology-related companies. A number of factors have dampened sentiment, leading investors to believe these companies are likely to face headwinds and growth expectations should be adjusted to reflect the changing market environment. As a result, the Nasdaq 100 Composite Index is down 27.5 percent in 2022 (May 20, 2022) after rising 26.7 percent in 2021.
The downward pressure seen on the Nasdaq 100 since early 2022 has erased gains recorded in 2021, reflecting investor concerns about the growth outlook. Individual company performance has outperformed the broader index, particularly companies that have shown strong growth rates over the past two years. For example, Coinbase saw a 73.7 percent drop, while Netflix is down 68.8 percent year-to-date in 2022. Bigger and well-known tech names like Amazon and Microsoft have also seen selling pressure, down 36.9 percent and 24.6 percent, respectively, over the same period.
The venture capital (VC) industry remained resilient in 2021 as US-based companies raised US$329.6 billion compared to US$166.6 billion in 2020. In terms of investments, global VC reached -Capital expenditures $643 billion compared to $335 billion in 2020, up 92 percent year-on-year.
Additionally, the significant increase in the number of exits in 2021 has also improved the dry powder for the industry, which is expected to stay healthy in the near future. As such, liquidity in the VC industry may not be an immediate concern for the startup ecosystem, but the assessment process will likely take longer to allocate funds into these companies. In other words, investment firms will examine and put more emphasis on business models and startups’ ability to weather a challenging and uncertain period before committing financially.
The pandemic-hit period has been a dream run for startups, especially those operating in the digital playground. However, that has changed significantly over the past three to four months with the sharp sell-off in public markets, particularly in technology stocks, as it has raised concerns about the valuation of some startups. As a result, markets are seeing an unusual tone from VCs as they advise their portfolio companies to brace for weak times and a difficult liquidity environment.
On the other hand, startups are transitioning from attitude to freezing or shrinking with the goal of rationalizing costs and minimizing burn-up rate in order to lengthen the runway. Some of these observed moves may be precautionary in nature as they prepare for uncertain times that may lie ahead, but few also raise pressing questions about startups’ business models with a lack of originality or weak fundamentals.
A total of 21,121 employees have been laid off at tech startups in recent months, compared to 5,892 in 2021. Companies benefiting from the pandemic, such as Netflix, Robinhood, MainStreet and OnDeck, are experiencing a slowdown in growth and are being forced to downsize to accommodate the Minimize overall business impact.
On the other hand, prominent tech companies like Meta and Google have decided to freeze the hiring of certain positions due to increasing uncertainty about business prospects.
In summary, startup founders need to re-evaluate their business models and continue to innovate to stay ahead of the curve and stay on the growth trajectory.
Additionally, the focus will now shift from pure growth to profitability or minimizing the overall cash burn to extend the runway. This will also be crucial for extending funding rounds as this may no longer be an easy and quick process. VCs, on the other hand, will take longer to evaluate and understand business models to ensure these companies are able to weather the challenges and slowdowns in demand from increased competition. This new phase could be a game changer for the startup ecosystem as it will differentiate companies that are able to build sustainable business models and are well positioned to navigate through these challenging times. On the other hand, this phase will also eliminate or fail startups that are built on weak foundations or borrowed foundations to capitalize on the startup and funding frenzy of the past 18 months.
Shailesh Dash is the founder and mentor of Dash Venture Labs. The views expressed are his own and do not reflect the policies of the newspaper.
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