There are companies with a value of up to 76% decrease, the source of money is exhausted, leading to a large-scale collapse, but few people will admit it.

Over the past half century, Silicon Valley has transitioned between two seemingly similar but often contradictory goals: Creating wealth and making money.

Wealth creation is the act of invention and patience, building a lasting business. Wait for high tide, raise the boat of employees, shareholders and everyone else. Making money is a more practical urge: Hunting for money quickly.

The Fall of 2022

The technology industry and its reckless bosses have more than once realized what happens when it comes to short-term profits instead of focusing on the development of stable companies that can create profits. make cool things. Yet all together here, at this moment. After years of overvalued companies, cryptocurrency scams and all forms of naked opportunism have led us to the “CALL OF 2022”.

So far this year, the tech-heavy S&P 500 has lost a fifth of its value. Among the hardest hit companies are Amazon.com (-36%), Tesla (-38%), Meta (-45%), Zoom (-44%) and Shopify (-76%). Overall, according to PitchBook, companies backed by venture capital funds that have listed shares during the pandemic have seen their shares drop 48%.

Partners at venture capital firm Lightspeed Venture Partners wrote in a note in May that:The boom of the last decade is clearly over“The industry-wide sentiment has changed.”Schadenfreude (Feeling pleasure over someone else’s pain) has been established“.

Religious senior leaders often argue that these recessions are macroeconomic acts of God, like a 100-year hurricane, or just 15 years shorter.

In this case, the argument is, two decades of low interest rates have made tech companies attractive investments, drawing capital from the public markets in their own right. Competition to support the most promising startups then pushed the valuations of some to unsustainable levels, until an unprecedented series of bad news (Covid-19, conflict in Ukraine) , inflation) caused it all to collapse. It would be simple to blame the world situation. But there’s a more realistic explanation, one that takes real reckoning, that the tech industry is, once again, facing the double impact of its own bad decisions.

It all starts with two things that motivate all venture capitalists:

1. Fear of missing out on the next big thing.

2. Greed.

A decade ago, companies just started exiting the startup scene, like Y Combinator, asking to be valued at millions of dollars before they made a single penny of revenue. To attract the most promising startups, certain VCs (venture funds), notably Andreessen Horowitz, have enthusiastically endorsed this high inflation and often allow innovators to set up withdrawals before they prove their business model.

Famous crashes, such as the blood-testing disaster Theranos and office-sharing startup WeWork, have resulted in some notable incidents but have not resulted in a serious retreat from the Monopoly mindset. this. Instead, VC firms and their new rivals, such as SoftBank Group Corp. and Tiger Global Management LLC, continue to invest and increase price step by step. “There’s a lot of money available at every stage and everywhere you look,” said Jeff Clavier, managing partner at early-stage investment firm Uncork Capital.

Understandably, many founders took all the cheap money they could get. Some large startups raise multiple rounds of funding each year. Given the degree of eagerness many investors have toward certain-sounding bets, the inherently risk-averse must also weigh in with fear of missing out.

But, some IPOs didn’t happen. A prime example is WeWork’s IPO in 2019, which collapsed following a shocking disclosure of its financial situation. Very quickly, however, private companies found a way to deal with special purpose acquisition companies (SPACs).

These companies have paved the way for businesses including lender SoFi, spaceflight company Rocket Lab and Virgin Galactic, pet product subscription service Bark and Grab (Southeast Asia’s Uber) to IPO. Currently, the shares of all these companies are trading below their IPO asking prices. “Some companies haven’t been able to get to where they should have been when they went public,” said Yelena Dunaevsky, an attorney specializing in SPACs at the law firm Woodruff Sawyer.

This bad behavior has been tempered by the tumultuous crypto markets, which have blinded Silicon Valley and industry partners around the world, leaving many others at great risk. Speculators pour money into cryptocurrencies, shady exchanges and virtual assets.

But most of the interest in cryptocurrencies to date has tended to involve quick withdrawals. Coins and stablecoins like TerraUSD, which have recently fallen in value after witnessing a crash, have been compared to a “bank run”. Since the start of the year, the Bloomberg Galaxy Crypto Index, which measures the performance of major cryptocurrencies, has dropped 48%.

THERE’S SOMETHING WRONG

Things have gone so far that there is a sense of “something is wrong here” especially during this year’s Super Bowl season, when NBC aired a cryptocurrency commercial starring LeBron James, Matt Damon and Larry David .

Despite its similarities to previous recessions, “The Fall of 2022” also feels strangely unfamiliar, perhaps because it’s been so long since the last shock. at this same high level. One ominous difference is that previous boom cycles lasted about eight years. Like a long dormant volcano, pressure has been building on the mountain for more than a decade.

By 2021, US tech startups have raised triple the amount they raised in 2000, and the fallout is as global as the industry’s previous downturn. never happend. Share prices and valuations have fallen from Britain to China.

The tech world also feels more divided than it did during the previous recession. Nowhere is this more evident than in Elon Musk’s acquisition of Twitter. Over the past month, Musk has declared his allegiance to the Republican Party.

This feels very different. Steve Jobs and Bill Gates were also unpopular with politicians, but remained steadfast in “keeping themselves” apolitical for a reason — they needed customers from both sides. Now, the tech block is collapsing. First, former President Donald Trump forced tech companies to side with issues like immigration, free speech and misinformation and proposed banning TikTok.

Even in the absence of Trump’s daily tweets, today’s startup founders and investors still have to factor in the politics of the likes of Musk, Peter Thiel and Marc Andreessen on issues like college loan relief, taxes. The acrimony has led to a famous wave of “defectors” from Silicon Valley to Miami and Austin. The tech industry can no longer even agree on a once-global consensus: Is the Bay Area the center of its world?

One thing that probably won’t change during this downturn is the identity of the winners and losers: Regular investors and qualified employees. Just like founders and institutional investors who sold off their shares during the good times, VCs earn huge management fees regardless of what happens to the startups in the list. their investments. These investors still hold a record $300 billion in uninvested capital and will continue to earn management fees regardless of their performance or market performance.

Meanwhile, more than 13,000 tech workers around the world have been laid off since early April, according to tracking website Layoffs.fyi, including massive layoffs at Netflix and the stock exchange. Robinhood Markets. There’s probably a lot more to come, especially if the recession drags on into 2023.”We haven’t seen any real carnage yet“, said venture capitalist Elad Gil.Things tend to happen when money really runs out. I think a lot of people are still uncertain or in denial about this prediction“.

Of course, denial is the ticket to disaster in any market downturn, and no one wants bad things to happen.

Technologies like augmented reality, though, are making many industry veterans optimistic. “Oddly enough, I’m pretty optimistic“, said Michael Moritz, partner at Sequoia Capital.This shock will give almighty resources to many companies, and some will be able to withstand the consequences and others will not. Those who can do it will be fine“.

Source: Bloomberg BusinessWeek