Technology companies are suddenly faced with falling valuations and investors stepping on the brakes.
This leads to redundancies in a sector that until recently could not be counted on.
FD / J.Houtman
S. van Gils
Amsterdam, May 28th 2022–A number of tech companies that enjoyed pandemic-related surges are facing a correction, due to a number of factors, from rising inflation, economic distress, the on-going wars and shifting consumer taste buds.
Where trees grew into the sky during the corona pandemic, tech companies are now losing hundreds of billions in market value. Privately funded start-ups also struggle to attract new capital. That is why many companies are cutting the organization.
The change is also noticeable in the Netherlands. “We have warned our companies that a rough period is coming,” says founder Laurens Groenendijk of the Dutch Founders Fund investment fund. ‘We advise them to quickly adapt their business operations to this.’ The advice is also heard elsewhere in the Dutch tech sector: fasten seat belts.
Foreign tech companies are already taking measures, such as taxi service Uber and social media companies Snap and Meta (formerly Facebook). Last week, one reorganization after another was in the news: the Swedish payment company Klarna is cutting 700 jobs, speed camera Getir dismisses 4000 people, competitor Gorillas 300 and streaming service Netflix sends 150 people home.
US tech investors Sequoia Capital and Y Combinator warn of a downturn. The latter is calling on companies it invests in an email to prepare for the worst.
For years, things have been going uphill in the tech sector. The stock prices of Apple, Amazon and Meta drove the stock markets to record highs, game consoles and iPhones flew out of the stores. During the corona pandemic, people subscribed en masse to Netflix. Due to the low interest rates, investors were bursting with money. Tech starters took advantage of this by selling stocks at skyrocketing valuations.
There has now been a significant change. Technology index Nasdaq has already lost a quarter of its value this year, the sharpest drop since the stock market crash at the start of the corona crisis in 2020. Venture capital investments will fall 19% this quarter, market researcher CB Insights predicts.
The contrast with a year ago is enormous, says analyst Albert Jellema of ProBeleggen. ‘Suddenly everyone is wondering in conference calls when the company will break even.’ Where until recently only the future perspective was important for many tech companies, now the revenue model has to be right too, he notes. One of the companies he follows, communication services company CM.com, suddenly wants to make a profit from the end of 2023, while that was never an issue before.
“We keep going from one extreme to the other,” says Ali Niknam, founder and CEO of the hitherto loss-making banking app Bunq. He sees no reason to change his own strategy in the changing sentiment and hopes that the labor market will become less tense as a result.
The turnaround on the stock market is mainly due to rising interest rates, in addition to uncertainty due to the war in Ukraine and sharply rising inflation. The high valuation of tech stocks was based on revenue growth and profitability forecasts. But higher interest rates lower the value of future earnings, pushing investors down the leash.
This also affects other tech companies, whose value is usually related to listed industry peers.
These valuations are also under pressure, say investment companies Endeit and Rockstart in addition to Groenendijk. “A foreign colleague told me that recently he had five unicorns (a tech company with a value of $1 billion, ed.) and now zero,” says Groenendijk.
This lower valuation makes it more difficult for tech companies to raise capital. In new rounds of the same size, investors demand not 20% but 25% of the shares, Groenendijk noted. “Investors have gained more power,” he says.
Especially business angels, such as tech entrepreneurs who invest themselves, will step on the brakes more, Rockstart CEO Rune Theill expects. He suspects that this group also invests in other stocks and sees its assets shrink.
But the large venture capital funds are also cautious in the event of a downturn.
This even applies to parties that have enough cash in hand, according to the American investment fund Y Combinator, which invested money at an early stage in, among others, Airbnb and Dropbox. “This means less competition between funds, lower valuations and fewer deals,” the fund wrote in an email to its companies.
In recent years there has been a lot of competition for investments,” said Hubert Deitmers, founder of investor Endeit. “Now it’s much more: just look at it.” Lower valuations make investing cheaper, he says, but the uncertainty makes an investment “.
J.Houtman/J-F. van Wijnen/ S.van Gils / FD