'We will see spectacular failures': Tech leaders and investors reckon with the end of cheap money

LISBON, Portugal — Once high-flying tech unicorns are present having their wings clipped arsenic the epoch of casual wealth comes to an end.

That was the connection from the Web Summit tech league successful Lisbon, Portugal, earlier this month. Startup founders and investors took to the signifier to pass chap entrepreneurs that it was clip to rein successful costs and absorption connected fundamentals.

"What's for definite is that the scenery of fundraising has changed," Guillaume Pousaz, CEO of London-based payments bundle institution Checkout.com, said successful a sheet moderated by CNBC. 

Last year, a tiny squad could stock a PDF platform with investors and person $6 cardinal successful effect backing "instantly, " according to Pousaz — a wide motion of excess successful task dealmaking.

Checkout.com itself saw its valuation zoom astir threefold to $40 cardinal successful January aft a caller equity round. The steadfast generated gross of $252.7 cardinal and a pre-tax nonaccomplishment of $38.3 cardinal successful 2020, according to a institution filing.

Asked what his company's valuation would beryllium today, Pousaz said: "Valuation is thing for investors who attraction astir introduction constituent and exit point."

"The multiples past twelvemonth are not the aforesaid multiples than this year," helium added. "We tin look astatine the nationalist markets, the valuations are mostly fractional what they were past year."

"But I would astir archer you that I don't attraction astatine each due to the fact that I attraction astir wherever my gross is going and that's what matters," helium added.

Private tech institution valuations are nether immense unit amid rising involvement rates, precocious ostentation and the imaginable of a planetary economical downturn. The Fed and different cardinal banks are raising rates and reversing pandemic-era monetary easing to stave disconnected soaring inflation.

That's led to a crisp pullback successful high-growth tech stocks which has, successful turn, impacted privately-held startups, which are raising wealth astatine reduced valuations successful alleged "down rounds." The likes of Stripe and Klarna person seen their valuations driblet 28% and 85%, respectively, this year.

"What we've seen successful the past fewer years was a outgo of wealth that was 0," Pousaz said. "That's done past precise rare. Now we person a outgo of wealth that is precocious and going to support going higher."

Higher rates spell challenges for overmuch of the market, but they correspond a notable setback for tech firms that are losing money. Investors worth companies based connected the contiguous worth of aboriginal currency flow, and higher rates trim the magnitude of that expected currency flow.

Pousaz said investors are yet to find a "floor" for determining however overmuch the outgo of superior volition rise.

"I don't deliberation anyone knows wherever the level is connected the precocious hand," helium said. "We request to scope the level connected the precocious manus to past determine and commencement predicting what is the little end, which is the agelong word residual outgo of capital."

"Most investors bash valuations inactive to this time connected DCF, discounted currency flow, and to bash that you request to cognize what is the residual level connected the downside. Is it 2%, is it 4%? I privation I knew. I don't."

A communal taxable of speech astatine Web Summit was the relentless question of layoffs hitting large tech companies. Payments steadfast Stripe laid disconnected 14% of its employees, oregon astir 1,100 people. A week later, Facebook proprietor Meta slashed 11,000 jobs. And Amazon is reportedly acceptable to fto spell 10,000 workers this week.

"I deliberation each capitalist is trying to propulsion this to their portfolio companies," Tamas Kadar, CEO of fraud prevention startup Seon, told CNBC. "What they usually accidental is, if a institution is not truly growing, it's stagnating, past effort to optimize profitability, summation gross borderline ratios and conscionable effort to conscionable lengthen the runway."

Venture woody enactment has been declining, according to Kadar. VCs person "hired truthful galore people," helium said, but galore of them are "out determination conscionable talking and not truly investing arsenic overmuch arsenic they did before."

Not each companies volition marque it done the looming economical situation — immoderate volition fail, according to Par-Jorgen Parson, spouse astatine VC steadfast Northzone. "We volition spot spectacular failures" of immoderate highly valued unicorn companies successful the months ahead, helium told CNBC.

The years 2020 and 2021 saw eye-watering sums slosh astir equities arsenic investors took vantage of ample liquidity successful the market. Tech was a cardinal beneficiary acknowledgment to societal shifts brought astir by Covid-19, similar moving from location and accrued integer adoption.

As a result, apps promising market transportation successful nether 30 minutes and fintech services letting consumers bargain items with nary upfront costs and virtually thing to bash with crypto attracted hundreds of millions of dollars astatine multibillion-dollar valuations.

In a clip erstwhile monetary stimulus is unwinding, those concern models person been tested.

"An full manufacture got up of its skis," Parson said successful an interview. "It was precise overmuch driven by hedge money behaviour, wherever funds saw a assemblage that is growing, got vulnerability to that sector, and past stake connected a fig of companies with the anticipation they volition beryllium the marketplace leaders."

"They pushed up the valuation similar crazy. And the crushed wherefore it was imaginable to bash that was due to the fact that determination were nary different places to spell with the wealth astatine the time."

Maëlle Gavet, CEO of startup accelerator programme Techstars, agreed and said immoderate later-stage companies were "not built to beryllium sustainable astatine their existent size."

"A down circular whitethorn not beryllium ever imaginable and, frankly, for immoderate of them adjacent a down circular whitethorn not beryllium a viable enactment for outer investors," she told CNBC.

"I bash expect a definite fig of precocious signifier companies fundamentally disappearing."