Are we really approaching a recession?
In my podcast, I explore the many facets of the world of high technology, from development to marketing, sales and entrepreneurship, all with the aim of collecting key information about startups for listeners to draw part of this knowledge sharing. So what did I discover this week?
The world is going through something. Ok, that could be a big statement. At least the tech sector, to be sure, has its ups and downs. Looking at the unprecedented numbers of the last year, from a global perspective, it would seem that the technology has reached its peak. VCs invested a total of $643 billion, up from $335 billion for 2020, showing an incredible increase in the total number of funds allocated to startups. Additionally, a record number of unicorns have been announced as well as venture-backed companies that have gone public. In fact, nearly 238 companies went public in 2021, valued at over $1 billion, almost 4 times the number of companies in 2020.
Yet with all the excitement in 2021, 2022 hasn’t shown the same surge. Keeping up with last year’s records, venture capitalists are cutting their funding rounds, companies are laying off employees in droves, and even others are shutting down for good. There are even jokes (regarding these, to boot) that maybe now is not the time to start a startup because there seems to be no one willing to give funding .
Many industry professionals consider the trends we are seeing in the tech industry to be predictable. After all, what goes up must come down. However, is this a simple market correction or something that could potentially have much bigger fallout to come?
See both sides of the market
“We’re in the middle of everything that’s going on right now, we haven’t hit bottom… It could evolve into something bigger or more fundamental than it is, from now we are back to normal,” Tzvika adds, based on what he sees in the markets. With BDO providing financial and accounting services to startups and institutional investors, Tzvika has a fuller view of how the tech space interacts, although he does not in any way provide BDO’s official opinion on the matter or does not provide financial advice. While there are some alarming trends that could suggest the market is overcorrecting, Tzvika seems to be hinting that we are still “too early in the process” to know, but in many ways we are just going back to an idea of how things are supposed to work.
What we’re seeing now, Tzvika suggests, even started to express itself in mid-2021, just, in a way, no one was paying attention. As Tzvika describes, “You could see that despite corona, the markets were bubbling, money was almost not an issue. But if something is too good to be true, it’s not true, and we could already seeing SPACs crash in mid-2021, and that’s when the hot air has already started to come out. 2022, there seems to be a slowdown in mega valuations and unicorn announcements, which used to be almost weekly in 2021. “People realized there was something wrong,” as Tzvika puts it. “and then the hot air came out” even more than before.
Mainly corporate investors, along with other institutional investors, have stopped branding and overvaluing companies. While rounds may have taken less time and due diligence wasn’t as “diligent” in 2021, 2022 has finally gotten everything back in shape. As such, then began the decline in valuation of funding rounds in March 2022 and an apparent decrease in liquid capital and valuations 70-80% lower than in 2021. “VCs are still investing; the money is still there but valuations are lower. What Tzvika is pointing out here, however, is that while this could lead to something bigger, the market is simply reverting to how it interacted before 2021 and making more sense of almost an “outlier year.”
What does this mean for founders?
The truth is that the future is still uncertain. Market recalibration may mean that some businesses will fail, even good ones. However, “the market is not in crisis like in 2008, there is still money in the market, but last year was not normal and you cannot continue to run like this”, Tzvika told me. In terms of letting the hot air out, that’s exactly what the market is doing. Tzvika points out that companies need to be aware of the current market situation: cycles may not be as rapid or significant and they may require more intensive due diligence. If last year money was freer, in today’s markets it won’t be, and founders who realize this early will be in a better position to weather the storm.
Also, now will be the time when the technology is really tested. “Investors come into the market and see it as a market of opportunity,” Tzvika points out when discussing the availability of funds for scaling and growth, “but they are very careful about their valuations, and they have the power to play hardball”. Good and strong companies can survive this, especially those with strong technology that can show investors their innovation and unique value proposition. Investors will not be as willing to give their funds to just any company; they will seek to fund only those that solve a real problem.
While this may not be the certain or definitive news that people want to hear, Tzvika makes it very clear that ultimately the market is always on the move, and we don’t know for how long the air hot will last to be let out. But what we do know is that 2021 is over and successful entrepreneurs must adapt to the new realities of 2022 if they are to survive.