After the euphoria, tech startups come back to earth

“We’re back on the ground,” notes Charlie O’Donnell, founder of investment firm Brooklyn Bridge Ventures, after a 2021 crop during which “investors were taken.” (Photo: 123RF)

NEW YORK – After a euphoric year marked by record fundraising, tech startups are navigating between more expensive and less abundant money and a looming recession.

“We’re back on land,” notes Charlie O’Donnell, founder of investment firm Brooklyn Bridge Ventures, after a 2021 crop during which “investors were taken.”

Last year, about $311 billion was raised by venture capitalists, that is, investing in high-growth startups, more than double that of 2020, already a record year, according to CB Insights.

“There are many external factors that impact the market,” says Sunita Patel, business development manager at Silicon Valley Bank, citing rising interest rates, geopolitical conditions and sluggish financial markets.

As early as last May, investment and consulting firm Y Combinator warned startups seeking short-term funding: “Your chances of success are extremely low, even if your business is doing well. We recommend that you change your plans” and wait.

Because of this deteriorating climate, “we see valuations of companies melting,” in particular those close to an IPO, says Sunita Patel.

Shopping delivery platform Instacart now weighs in at $13 billion, according to various media outlets, up from $39 billion in March 2021.

As for the flagship self-driving software, Mobileye, it went from $50 billion to $17 billion between last December and its Wall Street debut last month.

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However, the situation is nowhere near as alarming as it was in 2000, or even 2008, the two dark periods for technology since the advent of the Internet.

Not all the amounts raised since 2020 have yet been invested, “so there is still a lot of capital available to companies in the sector”, says Sunita Patel.

“It still helps to be far enough away from a potential IPO,” notes Rob Devlin, co-founder of Metalenz, a start-up specializing in metaoptics, which lets you downsize a smartphone camera.

This small Boston company has just raised $30 million from investors. It had several qualities sought after by venture capitalists: one product already on the market, the next one in the boxes, and customers ready to buy.

It also depends on the sectors.

Securiti, a company specializing in data management and IT security, raised $75 million in early October, up from its last funding round in 2019.

For Rehan Jalil, its managing director, cybersecurity “is not affected, for the time being”, by the bad winds that blow over social media companies, in particular.

“A lot of mainstream platforms were raising funds based on arguments like ‘it’s trendy, it’s cool, it’s fun.’ Like the Clubhouse, for example,” notes Lee Edwards. “It became more difficult for them.”

According to this investor in the Californian fund Root Ventures, innovation in services and equipment for companies, from productivity software to task automation, is on the rise.

“Fundamentals”

“When you have less and less money to recruit employees, productivity becomes essential,” he explains.

“And when you think about our tensions with Russia, or those between China and Taiwan… a lot of people are talking about relocating industries, including President Joe Biden, who is encouraging investment in microchip manufacturing in the United States.

But even for growth sectors, there is a “return to fundamentals”, summarizes Sunita Patel – that is, discipline and rigorous austerity in economic models.

Venture capitalists “take longer” to make up their minds, and it often takes three to six months to finalize a deal, “which used to be the norm,” describes Jenny Rooke of investment firm Genoa Ventures.

“We need to have a lot more meetings in Silicon Valley and talk to more people,” says Rehan Jalil.

And the weather could still cool, according to startups and experts.

“There is turmoil on a global level, (…) so we chose to raise funds now,” says Mr. Jalil.

Not all companies will survive the storm.

“Many entrepreneurs will tell themselves that if they can’t get funding it’s because of the crash,” says Charlie O’Donnell, “but really, they wouldn’t find any in any context.”

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