For years, stock market commentators have been warning that the tech sector is wildly overvalued and will crash. Now, the daily stock market trends indicate that this is true.
The New York Nasdaq, which contains many of the world’s most valuable listed tech companies, has fallen 26% this year. Once high-faring companies, such as Netflix and Peloton, which helped keep us distracted and fit during the pandemic, are down 70% and 60% respectively.
And it’s not just US tech stocks that are feeling the crunch. Tech shares have fallen sharply in Europe and China as well. Deliveroo, which was listed in London last year, is down 58% this year. Sweden’s Spotify has fallen by 61%.
The simplest explanation for the crash is financial gravity: what goes up eventually comes down. Surging inflation, rising interest rates, an economic slowdown, and the global supply shocks caused by the war in Ukraine also appear to have triggered the latest decline.
How Does This Affect Startups?
The IPO market, which saw an extremely strong 2021, has already taken a hit, with activity slowing sharply in the second half of the first quarter.
According to a study by EY, the global IPO market saw 321 deals in Q1, down 37% from the previous year. In total, these IPOs raised $54.4bn, down 51%. Special Purpose Acquisition Companies (SPACs), which had become all the rage in the past few years as a quick and dirty way of listing companies, have all but disappeared.
With fewer IPOs, there is less money for institutional investors and VCs to recycle into the next generation of startups. Global VC funding has already fallen 19% in Q1 2022 compared to the previous quarter.
What Can Startups Do?
The trends in tech market valuations are already shifting the balance of power from entrepreneurs to investors. Startups planning to IPO this year may have to sit on the sidelines for longers.
The advice from investors and experienced entrepreneurs is pretty similar to that given at the start of the pandemic: to focus on your core business, communicate with your shareholders, preserve cash and extend your financial runway as much as possible to ride out the rough times.
But startups should also look to seize the opportunities thrown up by the market slowdown and poach good people from struggling competitors.
All does not look bleak for tech startups. VC firms are still stuffed with cash from record fundraisings in previous years and have no alternative but to invest their money. This will benefit early-stage investments and will shelter them from the storm.
Despite all the doom-laden talk about market crashes, all we may be seeing is a return to the historic patterns of funding. Let’s hope for the best and keep watching.