The Fed’s policy of huge monetary stimulation and negative real interest rates led venture capitalists to push up the prices of new tech businesses. Now that the Fed has said it is raising rates to “neutral” the air is coming out of the bubble.
Fear and Loathing Return to Tech Start-Ups
Workers are dumping their stock, companies are cutting costs, and layoffs abound as troubling economic forces hit tech start-ups.
By Erin Griffith, The New York Times, May 11, 2022
Start-up workers came into 2022 expecting another year of cash-gushing initial public offerings. Then the stock market tanked, Russia invaded Ukraine, inflation ballooned, and interest rates rose. Instead of going public, start-ups began cutting costs and laying off employees.
People started dumping their start-up stock, too…The share prices of some billion-dollar start-ups, known as “unicorns,” have plunged by 22 percent to 44 percent in recent months, he said…
On social media, investors and founders have issued a steady drumbeat of dramatic warnings, comparing negative sentiment to that of the early 2000s dot-com crash and stressing that a pullback is “real.”…Start-ups that went public amid the highs of the last two years are getting pummeled in the stock market, even more than the overall tech sector…“High-growth cash-burning businesses are, from an investor-sentiment perspective, clearly not in favor.” [end quote]
When, except in a bubble with cheaper-than-free lending, are cash-burning businesses ever a good investment?
This reminds me of an old joke about a money-losing bakery whose owner wants add another oven so he could make it up on volume.