Early data say no
The pandemic trade ended a while ago. The COVID-induced boom that propelled a large number of tech companies is also fading fast. The results appear in the Big Tech earnings. For startups, it’s bad news – the good times of recent years seem to be fading fast, with many startups sticking to speculative valuations and earnings that were nascent rather than impressive.
The question before us is simple: can the investment dynamics of the venture capital market slow down enough for startup valuations (essentially expectations) to match potential exit valuations (essentially predictions) before too many fledgling tech companies are priced as early – exits are still possible until mid-2021?
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The warning signs are mounting and we are not just talking about a changing monetary environment, although that does matter. We see technology companies in the public markets struggling to meet investor expectations for future growth in a number of categories.
Social media? wrestling. Fintech? wrestling. Stream content? wrestling. Trade? wrestling. Key industries that have spawned a myriad of expensive startups are staring at a market where their public compositions absorb water faster than bulls can save.
And the damage could get worse. After all, we haven’t even started the monetary tightening that is expected for the rest of the year. This is just the beginning.
Facebook shares are down about 25% this morning, dropping its market cap by about $200 billion. The Nasdaq Composite is down 1.8% as a whole. Cloud stocks are down 1.6%. Snap’s stock is down 19%. After dropping from about $175 a share to about $130 yesterday, PayPal is down another 4% this morning. Spotify shares are down 17%. Depending on your chosen index, Fintech stocks are down more than 2%.
All of this after we saw the sell-off from December through the new year in the value of software companies. It’s a changed landscape.
Why? Investors had valued many companies as if their pandemic bump were more akin to their new reality. However, it turns out that much of the pandemic growth was not for free — it came at the expense of later growth. In dork terms, revenue and user growth were not generated in the midst of COVID-19, but pulled forward. This led to great results in the short term, but slower growth in the medium term, as companies had already eaten their second and third dish during the aperitif portion of the evening meal.