At last month’s London Tech Week, an amendment to the event’s agenda spoke volumes. A panel discussion initially entitled ‘how to fundraise in climate tech’ was changed to ‘how to fundraise in a crash’, reflecting the recent reckoning brought to a prolonged period of frothy tech markets.
This was a “fun sign of the times”, remarked Kimberly Zou, the panel’s moderator and co-founder of market intelligence platform ClimateTechVC. Even if this shows a dose of rationality, the tougher times facing start-ups and the tech industry should be watched closely by economic developers.
Public markets have tanked in the face of war in Ukraine, supply issues, inflation and rising interest rates. This year, the tech-heavy Nasdaq stock index is down by almost 29%. Sky-high private market valuations have also begun their descent to Earth. According to Zanbato, a private share trading platform, portfolio holdings of private companies were down by 1.7% in the first quarter of 2022.
As funding dries up and companies cut costs, advocacy for high-growth start-ups as engines of job creation suddenly looks far less convincing. More than 36,000 start-up employees were laid off in the second quarter of 2022, marking the highest rate since mid-2020 at the height of the pandemic, according to tracker Layoffs.fyi.
Yet, there is reason for pause in this gloomy outlook. Many venture capitalists say bearish sentiment has brought a dose of rationality to a prolonged period of exuberance. The past two years “were pretty crazy” when it came to private market valuations and funding, Tom Henriksson, a general partner at European venture capital (VC) firm OpenOcean, told me recently. Now it has reached “more normal levels” in the market and there are still good deals to be had. Many software companies are even showing better unit economics today than five years ago, he adds.
This sentiment could bode well. Aggressive VC-fuelled expansion often comes at the expense of survivability, as epitomised by the well-documented fall of co-working giant WeWork. Start-ups that pursue more sustainable business models have more potential to survive, create jobs and generate positive economic and social impact.
Bullishness on start-up ecosystems is warranted too. Marc Penzel and JF Gauthier of Startup Genome recently told me that even if later-stage companies are affected by the current funding squeeze, “the core engine of entrepreneurship and innovation” is still going strong. Indeed, last year saw 19 new ecosystems achieved their first unicorn — a start-up valued at $1bn or more — including Ho Chi Minh City, Vietnam; Brisbane, Australia; and Santiago-Valparaiso, Chile.
While funding and reduced start-up international expansion in this tighter environment will need to be monitored, overall tech ecosystems are likely to continue their growth. Innovative software solutions are still critical to digital transformation, providing opportunities for established tech companies and start-ups alike.
Developers are in short supply worldwide too. In this context, firing could be balanced out by hiring at other growing tech firms. Even as big names like the fintech Klarna, remote fitness platform Peloton and streaming giant Netflix announce layoffs, demand for tech talent seems higher than ever. Job postings for software developers are up by about 120% in the US compared to a pre-pandemic baseline, according to data from recruitment site Indeed.com.
The market correction might have brought a temporary reality check to start-ups and venture capitalists, but sell-off or not, tech is here to stay.