Pierre Bourdon is an investor at Picus Capital.
After the difficult The year being 2022, one might think that the coming months are not good for VCs or founders.
However, “dry powder” – money raised by VCs that has not yet been deployed – has risen to record levels. Venture capital investors in the United States, for example, are sitting on a $290 billion keg of powder ready to fuel new tech startups.1 Investors are cautious. But if handled wisely, the profits can be huge, especially since appraisals are so common.
But why is this happening and what does it mean for the technology industry? And why does the current market situation present an unprecedented opportunity for investors?
Tech stocks are seeing significant valuation corrections.
Tech stocks have had a whirlwind past year.
The Nasdaq Composite Index has posted losses of 32% since last January. For example, Meta, Amazon, Netflix and Google have seen their shares decline by 63%, 45%, 48% and 34% since the start of 2022. For these four stocks alone, such a decline represents a drop of $2.3 trillion in market value – 1.4 times the combined market capitalization of the 40 companies in the TecDAX, Germany’s largest stock market index.2
Stagnating currencies, looming layoffs, inflation and recession have led some pundits to label the difficult climate the “startup apocalypse.”
Such failures are due to adjustments in evaluation parameters. By 2021, the average enterprise value for listed cloud software companies was, at times, as high as 20x NTM revenues. Since the valuation correction in early 2022, multiples have normalized and are now at 5x to 10x NTM earnings.3
But last year’s recession has had an impact on private market startups. The average value of Series C rounds in Q2 2022 fell by one-third to $336 million from $500 million in Q4 2021.4
A lack of funding, crippling unemployment, inflation and recession have led some researchers to label the difficult climate the “startup apocalypse.” But despite these difficulties, technological trends show signs of hope.
The technology sector has remained strong
Strong growth in cloud and AI has kept key technology trends at bay, largely due in part to changes in the way we work. Driven by the need to ensure they are future-proofed, organizations have invested in improving their digital infrastructure and processes.
