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The tech sell-off has some enterprise capitalists fearful the great instances could also be coming to an finish

A conceptual image showing stock market numbers and flames.

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After a blockbuster year for venture capital deals, some investors fear the boom may not last much longer.

Tech startups raised a record $621 billion in venture capital globally in 2021, more than double the previous year, according to CB Insights. The number of private "unicorn" companies valued at $1 billion or more rose 69% to 959.

Private companies like Stripe and Klarna have seen their valuations soar to tens of billions of dollars, helped by a flood of cash as a result of ultra-loose monetary policy and the acceleration of digital adoption during the Covid-19 pandemic.

Now that the Federal Reserve has hinted at plans to raise interest rates to cool soaring prices, investors in high-growth tech companies are getting cold feet. The Nasdaq Composite is down over 15% so far this year as fears of tighter policy have prompted a rotation of growth stocks into sectors that would benefit from higher interest rates, such as financials.

Panic is starting to spread in the private markets over the tech sell-off. VC investors report that they are already hearing about renegotiations to lower valuations and even term sheets being revoked. Later companies are likely to be hit the hardest, they say, while some companies' plans to go public could be put on hold for the foreseeable future.

"It definitely trickles down to the private markets and later rounds," said Ophelia Brown, founder of Blossom Capital. "Term sheets are being renegotiated. Some term sheets have been withdrawn."

The shift in tone reflects negative sentiment towards start-up investing at the start of the Covid pandemic. In March 2020, Sequoia warned the founders about "turbulence" in a blog post attached to his presentation "R.I.P. Good Times” from 2008. For a brief period, the Silicon Valley company was right: Some startups initially saw their valuations down, while others had term sheets withdrawn.

But what followed was a stellar year for startup investing, with companies raising $294 billion globally in 2020. Hedge fund giant Tiger Global became a significant force in the market, backing tech companies much earlier than before when traditional investors sought returns through alternative investments.

However, Brown believes that some of the reaction in both publicly and privately traded tech stocks has been overdone and that given the mountain of money available in private markets, most startups should be able to weather a changing survive the economic cycle.

"There is so much dry powder left for new funding rounds," she said. "Most companies are very well funded so they should be able to get through this unless they're really reckless with their money."

down rounds

A handful of companies managed to set up impressive rounds of financing in the first few weeks of the new year. Checkout.com, a UK-based payments company in which Brown has invested, has closed a $1 billion deal at a valuation of $40 billion, while Estonian ride-hailing company Bolt is valued at $8.4 billion. dollars in a $711 million fundraiser.

However, some VCs worry that we may see a wave of "downturns" where startups raise funds at lower valuations than previous rounds. They say companies in the later stages of fundraising are likely to be hit hardest.

"There will be more downward pressure on prices in later rounds," said Saar Gur, general partner of venture capital firm CRV.

"We will see more rating compression and it will be harder to complete many rounds in later stages," Gur added. "And we're not going to see companies have such quick markups without much more business progression."

Gur, an early investor in DoorDash, said many private startups have achieved multi-billion dollar valuations based on comparisons to stock market multiples. Now that several high-profile tech companies have seen their share prices fall, competitors in the private markets may be forced to follow suit, he says.

Still, not everything is doom and gloom, according to Gur: "I still think the system is full of capital and great companies will rise."

Dotcom bust?

Hussein Kanji, a partner at Hoxton Ventures, believes private technology companies are likely to halt any plans for IPOs if liquidity conditions begin to tighten.

"I think the IPO window is closing," Kanji said. "Any funds with companies that think they will expire in 2022 are likely to falter."

Still, there's plenty of money in SPACs, or special-purpose acquisition companies, that sit on the sidelines, Kanji said. SPACs are publicly traded shell companies that take other companies public through mergers. In 2021, these companies raised a record $145 billion, almost doubling the amount from the previous year.

Some investors worry that tighter policies could cause a stock market slump comparable to the bursting of the dot-com bubble in the early 2000s. While it's worth noting, there have long been concerns that US stocks are in a bubble.

"I'm curious if this is like [a] dot-com fix and dragging on, or [just] a blip," Kanji said.

Whatever happens in the public markets, early-stage companies are unlikely to be affected, according to Brown, who previously worked at Index Ventures and LocalGlobe.

"It will take some time" for the fallout from the tech stocks slide to hit early-stage startups, she said, adding that companies growing up in earlier stages "have always been somewhat sheltered from the public markets."

Mergers and acquisitions could provide an alternative path for companies that have been planning to go public, Brown said.

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