Tech leaders face higher interest rates, lower turnover and layoffs

Guillaume Pousaz, CEO and founder of payment platform, speaks on stage at the 2022 Web Summit tech conference.

Horacio Villalobos | Getty Images

LISBON, Portugal – The wings of the once high-flying high-tech unicorns are due to the end of the era of easy money.

That was the message from the Web Summit tech conference in Lisbon, Portugal, earlier this month. Startup founders and investors took to the stage to warn fellow entrepreneurs that it’s time to rein in spending and focus on the basics.

“What’s certain is that the fundraising landscape has changed,” Guillaume Pousaz, CEO of London-based payments software company, said on a panel moderated by CNBC.

Last year, a small team was able to share a PDF deck with investors and receive $6 million in seed funding “immediately,” according to Pousaz—a clear sign of the glut in venture deals. itself saw its valuation nearly triple to $40 billion after a new equity round in January. The company had revenue of $252.7 million in 2020 and a pre-tax loss of $38.3 million in 2020, according to a company filing.

Asked what his company’s valuation would be today, Pousaz said: “Valuation is something for investors who care about entry and exit points.”

“Last year’s layers are not the same as this year’s,” he said. “We can look at the public markets, valuations are basically half of what they were last year.”

“But I would almost tell you I don’t care because I care about where my income goes and that’s important,” he said.

Increased cost of capital

Valuations of private technology companies are under tremendous pressure amid rising interest rates, high inflation and the possibility of a global economic recession. The Fed and other central banks are raising interest rates to curb rising inflation and reversing pandemic-era monetary easing.

This led to a sharp decline in high-growth tech stocks, which in turn affected private startups, which raised money at low valuations during so-called “down times.” The valuations of companies like Stripe and Klarna have fallen by 28% and 85% respectively this year.

“The value for money we’ve seen in the last few years has been 0,” Pousaz said. “This is very rare in history. Now we have a cost of money that is high and will continue to rise.”

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Higher rates spell trouble for much of the market, but are a notable setback for money-losing tech firms. Investors value companies based on the present value of future cash flows, and higher rates reduce these expected cash flows.

Pousaz said investors have yet to find a “floor” to determine how much the value of equity will increase.

“I don’t think anyone knows where the floor is from the top. “We then need to hit the floor on the upside to make a decision and start predicting what the downside is, which is the long-term residual value of capital.”

“Most investors are still doing DCF, discounted cash flow valuations, and for that you need to know what the residual floor is on the downside. 2%, 4%? I wish I knew. ‘t.”

“An entire industry got ahead of its skis”

A common topic of conversation at Web Summit was the relentless wave of layoffs hitting big tech companies. Payments firm Stripe has laid off 14% of its workforce, or about 1,100 people. A week later, Facebook owner Meta cut 11,000 jobs. And Amazon is reportedly laying off 10,000 workers this week.

“I think every investor is trying to communicate that to their portfolio companies,” Tamas Kadar, CEO of fraud prevention startup Seon, told CNBC. “Typically, they say, if a company is not really growing, it’s stagnant, then try to optimize profitability, increase gross margin ratios and just extend the runway.”

According to Kadar, venture deal activity has decreased. VCs have “hired a lot of people,” he said, but many of them are “just out there talking and not investing as much as they used to.”

According to Par-Jorgen Parson, a partner at Northzone VC firm, not all companies will survive the coming economic crisis – some will fail. In the coming months, we’re going to see some “spectacular failures” of some high-value unicorns, CNBC said.

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In 2020 and 2021, eye-popping amounts fell around stocks as investors took advantage of the ample liquidity in the market. Technology has been a major beneficiary of societal changes brought about by Covid-19, such as working from home and increased digital adoption.

As a result, apps that promise grocery delivery in less than 30 minutes and fintech services that allow consumers to buy items with no upfront cost and virtually nothing to do with cryptocurrency have raised hundreds of millions at multibillion-dollar valuations.

In an era of reduced monetary stimulus, these business models have been tested.

“An entire industry got ahead of their skis,” Parson said in an interview. “It was heavily influenced by hedge fund behavior where funds see a growing sector, get exposure to that sector and then bet on a number of companies with the expectation that they will be market leaders.”

“They raised the valuation like crazy. The reason it was possible was because there were no other places to go with the money at the time.”

Maëlle Gavet, CEO of startup accelerator program Techstars, agreed, saying that some later-stage companies “are not built to be sustainable at their current size.”

“A bottom round may not always be possible, and frankly, for some, even a bottom round may not be a viable option for foreign investors,” he told CNBC.

“I expect a certain number of latecomers to basically disappear.”

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