As recession fears mount, the tech industry has been especially hard hit. The war in Ukraine, 40-year highs in inflation, and an interest rate turnaround are all taking their toll. The industry is now bracing for a historic slump, with VC firms pulling back, layoffs looming, and share prices plummeting.
The state of tech
For the past few years, the industry has been on a tear, with companies like Apple, Amazon, and Google seemingly invincible. But now, those same companies are facing serious headwinds.
Apple, for example, is down $500 billion from its peak market value in January, despite posting record revenue. Microsoft, Amazon, Tesla, and Alphabet have all lost more than 20 percent of their value this year, while Netflix has lost a staggering 70 percent.
Another notable casualty has been Facebook, which is down 40 percent this year. The social media giant recently announced that it would freeze hiring, and it’s not the only one cutting back on costs.
Start-ups have also been hit hard, with around 30 companies laying off employees since the beginning of April, according to Layoffs.fyi, which tracks layoffs in the tech industry.
The opportunity
With major companies shedding talent, skilled workers are increasingly striking out on their own. This “shake out” of great talent could lead to a surge in innovative new startups over the next few years.
For early-stage investors, this presents a unique opportunity to get in on the ground floor of some potentially groundbreaking companies. In other words, a “dip” in the market may actually be a great time to invest in the next generation of tech companies.
Historic VC slumps
Similar to public markets, private markets experience a decrease in value during an economic recession.
This VC pullback can have a big impact on startup funding. When VCs are less active, it can lead to lower valuations and fewer rounds of financing for startups. As a result, many startups are forced to scale back their operations or even shut down entirely.
One major VC slump was during the dot-com crash of the early 2000s. This downturn led to the demise of many multi-billion-dollar startups, including Pets.com and Webvan.
However, the dot-com crash also gave birth to some of today’s most successful companies, such as Google and Amazon. So while a VC pullback can be devastating for some startups, it can also create opportunities for others to thrive.
Moreover, VC pullbacks are neither as deep nor as prolonged as public market slumps. Research by Neuberger Berman Group highlights that private equity funds fared better than public markets in the dot-com bubble and the Great Financial Crisis.
What does this mean for you?
If you’re thinking about investing in tech startups, the current market conditions may actually be in your favor. With VC activity down, startups are more likely to be open to accepting financing at lower valuations. This means you can get in on some potentially great companies at a discount.
Of course, it’s important to do your homework before investing in any startup. But if you’re patient and pick your investments carefully, the current market conditions could be a great opportunity to score some big wins in the years to come.
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