After a successful year for venture deals, major investors fear that the tech start-up investment boom may be over. In 2021, tech startups raised a record $621 billion in venture capital funding globally, more than doubling from a year earlier, according to research from CB Insights. The number of unicorn companies valued at $1 billion or more rose 69% to 959. Tech Startup Investment Boom!
Now, with the US Federal Reserve hinting at plans to raise interest rates in a bid to dampen price increases, investors in high-growth tech companies are tensed and wary of unpredictable market reversals. The Nasdaq Composite Index has fallen more than 15% this year as fears of a policy tightening led growth stocks to move into sectors that would benefit from higher rates, such as finance.
“This is definitely seeping into private markets and beyond,” said Ophelia Brown, founder of Blossom Capital. “Requirements for the conditions are being reviewed. Some conditions have been removed.”
The change in tone echoes the backlash against startup investment due to the onset of the Covid pandemic. In March 2020, Sequoia warned the founders of “turbulence” in a blog post, reminiscent of its 2008 Rest in Peace Good Times presentation. For a short time, the Silicon Valley company was right: a number of startups had initial valuation cuts, while others had their funding terms removed.
But what followed was a landmark year for startup investment, with companies raising $294 billion worldwide in 2020. Hedge fund giant Tiger Global has become a significant force in the market, backing tech start-ups much earlier than before as traditional investors looked to capitalize on alternative assets.
“There is still so much dry powder for new funding rounds,” she said. “Most companies were very well funded and, if they weren’t completely reckless with money, they should have been able to see things through.”
Tech Startup Investment Boom – Rounds down..
Several startup companies have managed to raise impressive funding rounds in the first few weeks of the new year. Checkout.com, the U.K. fintech company that Brown also invested in, closed a $1 billion deal at a monstrous $40 billion market valuation, while Estonian passenger transportation company Bolt was valued at $8.4 billion while raising $711 in new investment. million
But some VCs fear that we may soon see a wave of “top down rounds” where startups raise funds at a lower valuation than previous rounds. In their opinion, companies in the late stages of raising funds will suffer the most.
Still, Gur says it’s not all hopeless: “I still think the system is full of capital and great companies will grow.”
Sounds like the new dot-com bubble?
Hussain Kanji, a partner at Hoxton Ventures, believes that private tech companies are likely to put on hold any plans for initial public offerings as liquidity conditions begin to tighten.
“I think the IPO window will be closed,” Kanji said. “All funds with companies that planned to go public in 2022 are likely to stop.”
However, SPACs, or specialty acquisition companies, have a lot of money left out, according to Kanji. SPACs are registered shell companies that list other firms through mergers. These companies raised a record $145 billion in 2021, nearly double the amount from the previous year.
Many investors fear that tightening policy could send stock markets plummeting, much like the dot-com bubble burst in the early 2000s. Although it is worth noting that there have long been fears that US stocks are in a bubble.
Whatever happens in the public markets is unlikely to impact early stage companies, Brown, who previously worked at Index Ventures and LocalGlobe, said.
It “will take some time” for the effects of the tech stock crash to hit early-stage startups, she said, adding that early-stage fundraising companies “have always been somewhat shielded from the public markets.”
Mergers and acquisitions could be an alternative route for companies that have put off plans to go public, Brown said.