Bad news for start-ups from the latest technological massacre

Bad news for start-ups from the latest technological massacre

After all, the Nasdaq fell 28.9 percent from its peak last November to a low last week, an almost exact replica of its action two decades ago, when it fell 28 percent between February and May.

In 2000, the Nasdaq held a strong rally, which rose 23 percent from May to the end of August before suffering a brutal and prolonged collapse, in which it dropped 73 percent by September 2002.

Investors’ concerns are compounded by the fact that, as in the prelude to the crash, the US Federal Reserve is now raising interest rates.

The Fed raised the target interest rate from 4.75 percent in mid-1999 to 6.5 percent by August 2000.

Since March of this year, the Fed has raised interest rates by 75 basis points and indicated that it will continue to do so until they begin to take control of stubbornly high US inflation. As a result, investors expect the Fed to raise rates by another 50 basis points in June and July.

Nevertheless, some astute analysts point out that the malignant sell-off of some technology stocks cannot be explained by the relatively modest increase in interest rates that the Fed has so far enacted.

Nor can this be explained by a decline in subscribers or users. After all, investors knew that when people returned to work after pandemic restrictions ended, they would simply not have as much time on social media, watching television, or trading stocks as they did during the lock-in.

Instead, they argue that the sharp drop in values ​​clearly shows that much of the market was in bubble territory.

The problem, however, is that a sharp drop in valuations, especially for technology stocks, combined with rising global uncertainty has caused investors to avoid IPOs. [initial public offering] market.

And the virtual foreclosure of the IPO raises concerns among investors that we might see another feature of the dot-com bubble burst – the collapse of promising start-ups that have starved for the cash they need to keep up.

Start-ups are usually heavily dependent on regular capital inflows from investors because they have a negative cash flow when building their businesses.

When certain milestones are met – such as developing their technology to a certain level or reaching a certain revenue or customer goal – start-ups seek additional funding to fund their operations until they reach another milestone.

However, this financing model depends on whether investors are ready to distribute the cash they need for their development.

After the collapse of dotcom, the virtual closure of the IPO led to the collapse of many promising start-ups, which were deprived of the capital they needed to finance their loss-making operations.

Even those start-ups that were able to reach their pre-agreed milestones found that investors were not prepared to continue financing them because they knew that the lack of IPOs meant that there was no longer a market exit.

As a result, many start-ups were forced to engage in massive layoffs and emergency sales before eventually going bankrupt.

Some leading venture capitalists warn that this pattern now threatens to be repeated.

They emphasize that the entire risk capital ecosystem is fundamentally dependent on trust. Investors only participate in the early rounds of financing if they believe that the start-up will be able to raise more cash in later rounds of financing, which will eventually lead to a stock market debut.

As investors begin to worry that start-ups may not be able to raise cash in later rounds of financing, they will back down from supporting projects at an early stage.

What’s more, while existing venture capitalists will continue to support start-ups in later rounds of financing, they will be much more cautious.

This is because even if they are ready to put more money into the start-up, they will be aware that some investors who have supported the company in the first rounds of financing would probably choose not to provide more money – either because they run out of money or because they have significant financial obligations to other start-ups.

This means that even those venture capitalists who have been prudent in allocating sufficient cash to invest in future rounds of financing may find themselves in financial distress as they are called upon to devote more capital to cover the deficit caused by their co-investors. leaving the next rounds of funding.

What’s more, start-ups usually rely on a small cohort of financial backers in the early stages of development, but expect to raise money from a wider group of investors when they can demonstrate that their business concept is viable.

But because investors avoid risk, it will be more difficult for even promising start-ups to attract as much capital as they need to continue. Some will inevitably run out of money and fail.

The casualty rate among listed companies is likely to be much lower, as they are likely to continue to be able to raise new capital, albeit by selling shares at a significant discount.

Instead, the companies most at risk of bankruptcy are start-ups that are heavily dependent on private capital.

In this environment, it will be much more difficult for companies in the early stages of development to find financial supporters.

If the IPO market remains closed, venture capital funds themselves will find it more difficult to raise new money.

This means that they are likely to focus their efforts on continuing to support their existing stable of start-ups rather than on other companies at an early stage.

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