What would a VC bust mean for the rest of us?

On May 23, 2022

Written by Technically Media CEO Chris Wink, Technical.ly’s Culture Builder newsletter features tips on growing powerful teams and dynamic workplaces. Below is the latest edition we published. Sign up to get the next one.

Two CEOs sounded almost cheerful about the prospect of a tech correction.

They both lead creative agencies with headcounts of around 100 people. Both have long been skeptical of surging investments into software startups — and critical of how business publications like Technical.ly routinely cover such financing news. In their eyes, the phenomenon is less healthy than the more dependable, if mundane, sight of sustainable businesses built on revenue.

They’ve both told me that they view venture-backed startups as something barely short of high-profile gambling — taking other people’s money, bidding up salaries against professional services firms and swinging with few consequences.

“You can be a VC-backed startup CEO for an entire career and never turn a profit,” one said. “I actually manage a budget.”

A healthy correction

That may be an especially uncharitable view of innovation financing, but their capitalist Schadenfreude was apparent. Though the slowing startup surge is part of a recessionary pullback that might also hurt their businesses, those CEOs predict it to be a healthy correction.

By many counts, the correction has already come. Public markets start first: The tech-heavy Nasdaq Composite shrank by nearly a third since its November peak. Initial public offerings are also down year to date, while the rate of mergers and acquisitions slowed in Q1 2022.

That dynamic trickles down to private markets. In recent weeks, Instacart slashed its own valuation by nearly 40% — a truly startling announcement — to reflect the current climate. Fintech company Mainstreet laid off 30% of its staff and Gopuff laid off at least 3% of its own workers. Early-stage investors are already pricing in the change and rapidly revising their offers, according to an influential VC.

There’s a straightforward reason why tech stocks are taking such a hit. Company ownership is essentially a stake in future earnings; in times of boom, tech stocks perform well as optimism toward innovation grows. As the Federal Reserve raises interest rates to combat inflation, those future earnings are eroded and stocks’ values drop. Capacity for acquisitions and justifications for going public dim while primary opportunities for younger startup investors to cash out get squeezed. In turn, how investors value those companies plummets.

Certainly not all forecasts of tech bubble collapse come to pass. In 2015, prominent investor Bill Gurley repeatedly raised the alarm of a looming crunch. “I do think you’ll see some dead unicorns this year,” he famously said. Instead, unicorns surged for another half-decade. Predicting the future is easier than predicting when that future will come to pass.

It’s much safer to bet on correction when the pain is already here. For venture-backed companies that are in the business of fast growth, valuations (the iconic 409a) and momentum comprise much of their lifeblood. For all the talk of disruption, many startup founders really are pack animals. Though a so-called “down round” for private companies is typically a humbling correction, it’s a lot easier to do when peers are already doing it. It risks sending a troubling message to employees with stock options and investors who came in at a higher valuation. But it also can bring the conversation back to reality. Salaries don’t often go backward — but a company’s worth certainly does.

All this matters — even for those who don’t found or fund startups

For other company builders, it’s a reminder that paper valuation doesn’t necessarily change how most companies create value. One classic aphorism of business strategy goes: When others are greedy, be fearful; when they’re fearful, be greedy. Many are economically fearful today, so instead focus on value creation and longterm plans. The US economy surged just as we settled in for an undying pandemic-triggered economic collapse in 2020 and your company missed the upswing if you got into too deep a defensive crouch. A crunch is a chance for the boldest thinkers to leap ahead of the competition.

What about those two CEOs?

They both reported a difficult last couple years, complete with high turnover, wage pressure and chaotic workplaces. Now, they say they’re in a better position to weather a more traditional recession.

One CEO assured me that he doesn’t wish for a recession — though he thinks a cocky batch of startup founders may take it worse than his company will. That ignores the employees inside any given company, but his point is clear: The American economy is still largely very healthy. Recessions are clarifying, so what is the more important work you can do to create value, grow your company and tell your company’s story?