For years, young companies making big promises had binged on money from venture capitalists and other private investors while reporting huge losses. Now, the thinking went, that would have to change.
Investors, flush with cash during the recovery from the coronavirus pandemic, kept looking for new places to park it. Startups pledging fast growth looked like a great option. US venture capital-backed companies raised almost $330 billion in 2021 — roughly double the previous record from 2020.
Almost three years after the WeWork scandal, however, a real reckoning could be in the offing, as the financial conditions that helped facilitate the startup boom begin to vanish.
Breaking it down: For the first time in years, interest rates are rising, dimming enthusiasm for speculative investments and pushing investors to dump their tech holdings en masse.
Meanwhile, market volatility is making it more difficult for companies to go public. That will make it harder for venture capitalists and other private investors to exit their positions, and could make it trickier for late-stage startups to secure funding.
That’s already showing up in the data, according to PitchBook, a research firm. While valuations for mature startups remain high, they fell in the first quarter compared with 2021.
On the radar: Companies still want to raise money by going public. Grocery delivery startup Instacart, one of most valuable private firms in the world, confidentially filed for an initial public offering this week.
But it won’t raise as much as it might have 12 months ago. Instacart revised its valuation from its peak of $39 billion down to about $24 billion in March, citing recent market turbulence.
Investments in early-stage startups are faring better for now, since they have a lot of time before they need to weigh IPOs, PitchBook said. But that could change in a “couple more quarters” if market conditions remain intact, sending a chill through the entire startup ecosystem.
Masa said it: Nowhere was the mood shift clearer than on SoftBank’s recent earnings call. CEO Masayoshi Son poured billions of dollars into startups in recent years, making him the most prominent tech investor in the world.
But on Thursday, SoftBank said its tech funds had lost more than $27 billion in its last fiscal year, by far their worst performance on record. In a presentation, Son acknowledged the losses and pledged to start taking a more conservative approach.
Going forward, the Japanese conglomerate will be more selective about which deals it takes on, roll out stricter criteria for new investments and focus on improving returns from its portfolio companies, he said.
More than $7 trillion has been wiped out from stocks
It’s no secret that the stock market’s meltdown has been brutal. …….