The inflationary scenario added to the increase in interest rates made start-up/scaleup investors question themselves: Investing my money here in this company, with the risk of the business, is more interesting than withdrawing my money and investing in some other available asset in the market, with equal/superior gains and with less risk?
When it comes to investments, we know that the more diversified the portfolio, the greater the protection of that asset. So if your portfolio has 10 asset types and 1 of them starts to underperform, you will not feel the weight of an entire portfolio, but of a part of it, offset by other assets that perform well.
The start-up market has been suffering from these macroeconomic changes that have been taking place in several countries around the world: it is no coincidence that European, American, Brazilian start-ups and those from many other origins have suffered the layoff.
In the US alone, until the beginning of August this year, 37,000 people lost their jobs in the technology sector. An example to mention is the giant Netflix which suffered its second round of layoffs in June (-300 people while in the first round 150 people were laid off) added to the unexpected loss of nearly 1 million users in Q2 2022 and after being overtaken by another streaming – Disney (for the first time since this business has existed).
Crunchbase listed some American technicians who have recently laid off their jobs and through this list, we can see that the only thing in common between them is the sector itself: from healthcare, real estate, data centre, food and beverage companies, to public companies and private.
What, besides inflation and high-interest rates, affects this market?
In 2022 we are seeing many companies and sectors slipping: the automotive sector started to suffer from the semiconductor crisis at the beginning of the COVID-19 pandemic in 2020 and there was a market expectation that the supply/demand ratio would normalize in 2 years. 2 years have passed, and the sector still faces difficulties. And not only this sector is affected by the lack of semiconductors on the market since it is one of the inputs for the production of cell phones and toys. According to a study by the Harvard Business Review, no improvement is expected until 2023 and, even so, the scenario for the coming years is still cloudy, as this item has been the target of crisis in the last 28 years – after all, with the advancement of technologies, is being increasingly used.
Even so, the businesses that grew during the COVID-19 pandemic have been skating due to this current post-pandemic: supply and demand are reaching stable levels, while for 2022 many companies planned their growth from the positive scenario of 2021, today it can be able to see that this optimistic view was hasty. E-commerce companies (both start-ups and large companies) for example have been suffering from the reduction in people's consumption. With unemployment rising in some countries, the average salary of new employees falling, and inflation rising together, governments have been trying to raise interest rates to end this cycle.
The extent of the current crisis in start-ups is so great that it ends up not only affecting young companies that still rely heavily on external capital: as the example of Netflix previously mentioned, other big techs such as Amazon and Uber have already issued realistic and Conservatives regarding the high hiring during the pandemic and which today is not bearable for the financial health of companies, as well as a reduction in the current hiring pace, seeking to satisfy only the open spaces, without projections above the market.
As another Crunchbase article showed, series A investments that had been above USD 45B since 2018 showed a reduction in 2022 to USD 20B. The same behaviour was also seen for B and C series investments.
What can we expect from the economy as a whole and how does it involve the survival of start-ups and tech companies?
In my opinion, and following the economic cycles since the first industrial revolution, the COVID-19 pandemic has brought yet another wave movement that was previously seen in 2008 and, as it did before, it has brought lessons to business. I don't see the disappearance of big techs, start-ups or technology companies, after all, over the years our technological learning has been expanding and with it bringing greater needs to meet the demands; however, as in every technological cycle, write-offs serve to normalize the market (layoffs, reduction of valuation) and with that return to a healthy expansion of the markets involved, in addition, of course, bringing with it the constant need for changes and adaptation of the products, businesses and people.
Edited and Reviewed by Tanish Bagga.
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