After the challenging year which was 2022, one can believe that the coming months are not looking good for VCs or founders.
But “dry powder” — money raised by VCs that hasn’t yet been deployed — has risen to record levels. Venture capital investors in the US, for example, are sitting on a $290 billion powder keg ready to ignite a new wave of tech startups.1 Investors are understandably cautious. But if handled wisely, the payoff can be big, especially since valuations have normalized drastically.
But why has this happened and what does it mean for the technology industry? And why does the current market environment offer an unprecedented opportunity for investors?
Tech stocks are seeing significant value adjustments
Tech stocks have been through a storm over the past year.
Nasdaq’s composite index has lost 32% since January last year. For example, Meta, Amazon, Netflix, and Google have seen their shares plunge by 63%, 45%, 48%, and 34%, respectively, since the start of 2022. For just these four stocks, such a decline has meant a loss of $2.3 trillion in market value – that is, 1.4 times the cumulative market value of all 40 companies in TecDAX, Germany’s largest stock market index.2
A funding freeze, soaring layoffs, inflation and a recession have led some pundits to label the harsh climate the “startup apocalypse.”
Such declines were driven by a correction in valuation calculations. In 2021, the average enterprise value of publicly traded cloud software companies was at times as high as 20x NTM earnings. Since the valuation correction in early 2022, multiples have normalized and are now around 5x to 10x NTM earnings.3
But last year’s downturn also affected startups in the private market. The average valuation of Series C rounds fell by about a third to $336 million in Q2 2022 from $500 million in Q4 2021.4
The lack of funding, soaring layoffs, inflation and a recession have led some pundits to label the harsh climate as the “startup apocalypse.” But despite these challenging circumstances, technological trends are showing signs of hope.
The technology sector has remained robust
Strong growth in cloud and AI has kept key technology trends stable, largely in part due to major changes in the way we work. Spurred on by the need to ensure they are prepared for the future, organizations have poured money into upgrading their digital infrastructure and processes.