After the challenging year being 2022, you might think the next few months don’t look great for VCs or founders.
But “dry powder” – money raised by VCs that has not yet been deployed – has risen to record levels. Venture capital investors in the United States, for example, are sitting on a $290 billion powder keg ready to unleash a new wave of tech startups.1 Investors are understandably cautious. But if handled wisely, the payoff can be big, especially as valuations have normalized dramatically.
But why has this happened and what does it mean for the tech industry? And why does the current market environment present an unprecedented opportunity for investors?
Technology stocks are undergoing significant valuation corrections
Tech stocks have been through a storm over the past year.
The Nasdaq composite index has lost 32% since last January. For example, Meta, Amazon, Netflix and Google have seen their shares plummet by 63%, 45%, 48% and 34% respectively since early 2022. For these four stocks alone, such a drop meant a drop of $2.3 trillion in market value – that’s 1.4 times the cumulative market capitalization of all 40 companies in the TecDAX, Germany’s largest stock market index.2
A fund freeze, skyrocketing layoffs, inflation and a recession have led some experts to label the difficult environment the “startup apocalypse.”
Such declines were caused by a correction in valuation statistics. In 2021, the average enterprise value for publicly traded cloud software companies could be as much as 20x NTM revenue. Since the valuation correction in early 2022, multiples have normalized and are now around 5x to 10x NTM yields.3
But last year’s downturn also affected startups in the private market. The average Series C round valuation fell about a third to $336 million in Q2 2022 from $500 million in Q4 2021.4
The lack of funding, skyrocketing layoffs, inflation and a recession have led some experts to label the difficult environment the “startup apocalypse.” But despite these challenging circumstances, technical trends give signs of hope.
The technology sector has remained resilient
Strong growth in cloud and AI has held key technology trends steady, largely due to massive shifts in the way we work. Spurred on by the need to ensure they are prepared for the future, organizations have been pouring money into upgrading their digital infrastructure and processes.