The Correction in Startup Valuations
Ever since the correction in the Nasdaq, venture investors have begun repricing a majority of funding rounds as well as some private unicorns and decacorns
It’s no secret that the past few months haven’t been the best for the technology ecosystem. With a 20% correction in the Nasdaq and companies such as Meta, DocuSign, CloudFlare, and more losing hundreds of billions in combined market value, it is safe to say that the technology market is entering a significant moment of repricing. This phenomenon is not just seen in public companies. Instacart recently had its ~$40 billion valuation slashed to a mere $24 billion despite growing key metrics. This is not the fault of startup founders nor investors. This issue stretches all the way back to the Federal Reserve.
What Does the Fed have to do with This?
The Fed has maintained some form of expansionary monetary policy for years, at least until the COVID pandemic. After the pandemic, despite mass unemployment, inflation increased to record highs. 7% annualized CPI increases were not common and the FED was conflicted between an unhealthy economy and exorbitant inflation. Around the end of 2021, the FED decided that the economy was in a good enough place to tackle the issue of inflation. As a result, they announced that they would begin tapering and announced interest rate increases. This had a significant impact on major indices such as the Dow and the Nasdaq.
Why Was Tech Affected the Most?
For the past decade, the Fed has been maintaining a heavy expansionary monetary policy. This has led people to invest in riskier investments such as cryptocurrency. For many investors, due to large volatility, tech investments have been lumped into this category of risky investments. Despite large market caps and exorbitant returns, tech stocks are still viewed as a risk. This is why a large majority of tech investments fell in value irrespective of revenue or user count.
How Does This Affect The Venture Market
There are many factors at play here but one is the prevalence of institutional L.P.s in the valley. Limited partners or L.P.s, are the people who invest outside of the fund. These can include wealthy private investors, large institutional funds, and more. Since the tech market is starting to lose money due to perceived risks, that means the venture market is facing an even steeper setback due to the immense volatility in investing in early-stage companies. Since funds are preparing for an interest rate hike, they need to be able to reallocate funds for their most risky sectors, starting with the venture market. This means that less money is being invested in private startups which means that better key metrics are needed to justify higher valuations than last year.
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