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After the Feast, The Fast: The great Silicon Valley shake-out

The Economist | Jun 28, 2022

Cash for rainy day - After the Feast, The Fast:  The great Silicon Valley shake-outNo year was fatter than 2021

According to cb Insights, a research firm, global tech startups raised $621bn in 2021. That is twice as much as the year before and ten times more than in 2012. Then the music stopped. First to feel it were publicly traded firms.

  • nasdaq Composite index has fallen by 30% from its peak last November.
  • PitchBook reckons more than 140 vc-backed firms that went public in America since 2020 have market capitalisations lower than the total amount of venture funding they raised over their lifetimes.
  • Faraday Future, an American maker of electric cars that had raised more than $3bn, is now worth just $710m.
  • Grab, a Singapore-based super-app, raised $14bn before its going public at a valuation of $40bn. Today its market value is $10bn. select private startup valuations decline - After the Feast, The Fast:  The great Silicon Valley shake-out

Fundraising has slowed sharply

The techno beatlessness is now spreading to the private markets. Fundraising has slowed sharply compared with the second half of 2021. Between March and May the number of funding rounds was down by 7% in America, compared with the same period last year, according to PitchBook. In Asia it declined by 11% and in Europe by 19%.

Things are almost certainly worse than those numbers suggest. A delay in reporting means they lag behind the reality on the ground by a few months. vc investors say that hardly any deals are being inked these days. Fewer startups are also “exiting”, vc lingo for being listed or sold on to other investors.

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The Economist estimates that a basket of 12 big startups worth $1trn at the start of this year is now worth about $750bn. That list includes Stripe, a fintech star, which has seen its secondary-market share price collapse by 45% since January, and ByteDance, TikTok’s Chinese parent company, the shares of which trade at a quarter below their value six months ago.

Trimming the fat

To avoid having to raise capital in a rush at a depressed valuation, founders are busy trimming the fat. “Last year one dollar of growth was all the same, whether it cost 90 cents or $1.5 to acquire it,” says Hilary Gosher of Insight Partners, a vc firm. Nowadays the watchwords are capital-efficient growth. The average cash-burn rate has fallen in the past year for all types of startup, from the youngest to the more mature, according to Brex’s data.  One way startups are containing costs is by cutting staff.

Three types of firms at higher risk

1. One are companies in competitive businesses, such as cybersecurity, instant delivery and fintech, which suffer from an “oversupply of venture capital”, says Asheem Chandna of Greylock Partners, one more vc firm. “Any time something starts working, vcs will go and fund ten of these,” he adds. The winners could do well. Middling firms may struggle to survive.

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2. The second higher-risk group are unlucky companies that did not raise money in 2021, when investors were generous and valuations sky-high.

3. The third category are firms most sensitive to consumer demand.

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