Tech leaders are calculating higher interest rates, lower rounds, and layoffs

Guillaume Posaz, CEO and founder of payment platform Checkout.com, speaking on stage at the 2022 Web Summit Technology Conference.

Horacio Villalobos | Getty Images

LISBON, Portugal – Once upon a time, its high-tech unicorn wings are now flying as the end of the era of easy money approaches.

That was the message from the Web Summit tech conference in Lisbon, Portugal, earlier this month. Startup founders and investors took to the platform to warn fellow entrepreneurs that it was time to rein in costs and focus on the essentials.

“What is certain is that the fundraising landscape has changed,” Guillaume Bosaz, CEO of London-based payment software company Checkout.com, said in a session moderated by CNBC.

Last year, a small team was able to share a PDF suite with investors and get $6 million in seed funding “on the spot,” according to Bosaz — a clear sign of a surplus in dealmaking.

Checkout.com itself saw its valuation nearly triple to $40 billion in January after a fresh round of shares. The company generated $252.7 million in revenue and a pre-tax loss of $38.3 million in 2020, according to the company’s filing.

Asked about his company’s valuation today, Bosaz said, “Valuation is something for investors who care about the entry point and the exit point.”

“Last year’s multiples are not the same as this year’s multiples,” he added. “We can look at the general markets, valuations are mostly half what they were last year.”

“But I’m almost telling you I don’t care at all because I care where my revenue goes and that’s what matters,” he added.

High cost of capital

Valuations of private technology companies are under tremendous pressure amid rising interest rates, rising inflation and the potential for a global economic slowdown. The Fed and other central banks are raising interest rates and reversing pandemic-era monetary easing to stave off high inflation.

This led to a sharp decline in shares of high-growth technology companies which in turn affected privately owned start-ups, which are raising money at discounted valuations in so-called “downside rounds”. The likes of Stripe and Klarna have seen their ratings drop by 28% and 85% respectively this year.

“What we’ve seen in the past few years has been a financial cost that has been zero,” Bosaz said. “This is very rare throughout history. Now we have a high cost of money and it will continue to rise.”

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The higher prices present challenges for most of the market, but they are a notable setback for tech companies that are losing money. Investors rate companies based on the present value of future cash flows, and higher rates reduce the amount of that expected cash flow.

Bosaz said investors have not yet found a “floor” for determining how much the cost of capital will rise.

“I don’t think anyone knows where the floor has the upper hand,” he said. “We need to get to the floor in the upper hand to decide and then start anticipating what the bottom line is, which is the long-term residual cost of capital.”

“Most investors still evaluate to this day on discounted cash flow, discounted cash flow, and in order to do that you need to know the bottom line remaining on the downside. Is it 2%, is it 4%? I wish I knew.”

‘An entire industry outperformed skates’

A popular topic of conversations at the Web Summit has been the ongoing wave of layoffs that has hit the big tech companies. Payments company Stripe has laid off 14% of its employees, or about 1,100 people. A week later, the Facebook Meta owner eliminated 11,000 jobs. Amazon is reportedly preparing to lay off 10,000 workers this week.

“I think every investor is trying to push this into their portfolio companies,” Tamas Kadar, CEO of fraud prevention startup Seon, told CNBC. “What they usually say is, if the company isn’t really growing, it’s in the doldrums, then try to improve profitability and increase gross margin ratios and just try to lengthen the runway.”

According to Kadar, the activity of venture deals is declining. Venture investors, he said, “have hired a lot of people,” but many of them are “just talking and not investing as much as they did before.”

Not all companies will survive the looming economic crisis — some will fail, according to Par-Jorgen Parson, partner at venture capital firm Northzone. “We’re going to see amazing failures” of some high-value unicorn companies in the coming months, he told CNBC.

VC says tech companies have

2020 and 2021 saw huge amounts of money around the stock as investors took advantage of the ample liquidity in the market. Technology has been a major beneficiary thanks to the societal shifts brought about by Covid-19, such as working from home and increasing digital adoption.

As a result, apps that promise grocery deliveries in less than 30 minutes and fintech services that allow consumers to purchase goods without upfront costs and anything related to cryptocurrency have attracted hundreds of millions of dollars with billions of dollars in valuations.

As the monetary incentive wears off, these business models have been tested.

“An entire industry has outdone its skates,” Parson said in an interview. “It was largely driven by hedge fund behavior, where the funds saw a sector grow, discovered that sector, and then bet on a number of companies with the expectation that they would be market leaders.”

“They raised the rating like crazy. The reason they could do that was because there were no other places to go with money at the time.”

Mile Javitt, CEO of startup accelerator program Techstars, agreed and said some later-stage companies were “not built to be sustainable at their current scale”.

“The bottom round may not always be possible, and frankly, for some of them the bottom round may not be a viable option for outside investors,” she told CNBC.

“I expect a certain number of late-stage companies to basically disappear.”

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