The startup frenzy is due a pause. Venture capitalists had invested more than $600 billion around the world by mid-December, twice the total for 2020 and an all-time high, according to PitchBook. As global markets wobble and central banks toy with raising interest rates, once-hot private companies will confront lower valuations in 2022.
Buoyed by strong historical returns, venture capitalists are flush with cash. Meanwhile, low interest rates have lured pension funds and firms like Tiger Global into backing riskier young companies. Software startups were the main beneficiaries, amassing over $190 billion in 2021, buoyed by trends like remote working and the digitisation of business processes.
The inflow of money has pushed prices ahead of financial performance. In 2021 the median late-stage investment in U.S. frontier tech was struck at a multiple of 32 times revenue, up from 20 times in 2020, according to Silicon Valley Bank data. But the median revenue growth rate of those companies was 26%, lower than other sectors.U.S. initial public offering in April 2021 valued the robotic software company at $28 billion, compared with $35 billion in a previous private round.
Private companies seeking to raise capital in 2022 may therefore have to sell shares at a lower valuation than before – a scenario called a “down round”. Though the company gets its cash, the sale can upset former backers and make it harder to retain or attract staff. For loss-making companies, the alternative is to conserve cash and hope investor demand picks up again. But time is limited. Most U.S. late-stage fintech and consumer internet companies can operate at a loss for about 16 months before running out of money, according to Silicon Valley Bank. That figure is down from over two years in 2020. For many startups, the coming 12 months will offer a reminder that valuations can go down as well as up.
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