Investment in technology companies is stalling as valuations fall. Tech stocks are dragging the market lower, sending the Nasdaq index down 24% this year. Shares of Snap are down two-thirds and Amazon by nearly a third. But startups still have reason to hope.
Forecasters believe that demand for the technology products and services they provide will increase this year. Despite rising inflation and geopolitical disruption, Gartner still forecast a 4% increase in global spending on IT services and products amounting to $4.4 billion. Analytics, cloud, and security teams will benefit the most.
Smart starting a business reassess their spending during the pandemic. In March 2020, venture capital firm Sequoia warned founders to think carefully about their cash flow, headcount and capital expenditure.
But the biggest defense is fundraising. In the first quarter of 2022, startups globally raised record totals, according to recent data from CB Insights. Investments in blockchain startups alone hit $9 billion in the first three months of the year.
PitchBook stats record a year-over-year decline in US venture capital investment in the first quarter at $70 billion. But investment in 2021 is 330 billion dollarsdouble the amount in 2020 and quadruple what it was five years ago.
The excess financing will help tech companies in times when the primary market is only closed or opened with adverse conditions.
Companies that entered the market last year, including fintechs Coinbase, Robin Hood hero, Toast and Marqueta, trade below their list prices. Prices may drop further. Valuations remain bullish despite the sell-off. Shiller’s price-to-earnings ratio, also known as the cyclically adjusted p/e (CAPE) ratio, has declined this year. But at 32, it’s still twice the historical average.
So far, startups are showing signs that they don’t need to be forced to list on the market to raise capital. According to EY, in the span of three months, the global market has only seen 321 initial public offerings of shares – down more than a third from the same period last year. By gathering capital from private markets when they can, startups have had time to themselves.