WSJ Headline: For Tech Startups, the Party Is Over
Subheadline: Funding is suddenly scarce as venture capital firms grow stingy, forcing young companies to get frugal and focus on breaking even
By Heather Somerville
May 16, 2022 10:12 am ET
https://archive.ph/cwXm6
“If you keep marking everything up, you’re eventually going to believe that those marks are accurate,” said Gil Dibner, a London-based venture capitalist.
Startups that raised big sums at high valuations faced pressure to grow, which they did by rapidly adding staff and making acquisitions. At some companies, the quality of work deteriorated, acquisitions weren’t thought out, leadership got distracted and cash burn soared, said some investors and startup founders.
“It was a scrum,” said Mr. Dibner. “When you shove that much money at pretty much anything, you change the way people make decisions.”
WSJ Headline: For Tech Startups, the Party Is Over
Some of the smartest things Tesla did in 2020 were the two secondary offerings when the sky high stock price allowed to do so with little dilution.
Tesla to raise up to $5 billion in share offering, its second in three months
https://www.cnbc.com/2020/12/08/tesla-to-raise-up-to-5-billi…
With all the factories the money bought they can now produce the cash flow in-house!
A curious statistic from my management consulting days, 75% of the businesses that go broke do so for lack of sufficient working capital. Better diluted than broke!!!
Denny Schlesinger
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Both Jeremy Grantham and Muhammad El Arian have been raising the alarm of corporate bonds since the pandemic took hold in the USA. Everything they warned us would happen be it startups, SPACs, crypto, and tech - always tech - is coming through as spot on predictions. Loads of these baby unicorns will now have to go under the knife and shed employees and assets, while cutting costs.
$TSLA is an outlier in expansion, for sure, but will there be any demand for expensive EVs in this coming recession? I’m still waiting to see how this $TWTR shakes out. I tried out some other social medias for a few days recently and all of them are too clunky, too partisan, and the best people with the most intriguing minds won’t bother with them.
From the same article in the OP:
Now, the public tech companies that powered the pandemic-era stock-market rally are suffering some of the market’s biggest losses. Shares of Facebook parent Meta and Amazon.com are down more than 30% this year, Apple Inc., Microsoft Corp. and Alphabet Inc. have all dropped around 20% and Netflix Inc. has fallen 69%. The S&P 500 is down 16% since the start of the year, and the Nasdaq Composite Index is off by more than a quarter from its high in November.
Private tech companies quickly looked overpriced. With interest rates rising to fight 8%-plus inflation, startups whose profits were years in the future had less appeal.
Particularly important to startups seeking big sums of capital are crossover funds, large money managers that invest in both stocks and private companies. Those managers accounted for around 70% of the dollars startups raised last year. Some, including Coatue Management LLC and D1 Capital Partners, quickly backed off from startup investing when the stock-market decline hammered their investments in public companies. In the first three months of 2022, crossover funds’ venture capital investments sank to the lowest level in six quarters, according to PitchBook.
$TSLA is an outlier in expansion, for sure, but will there be any demand for expensive EVs in this coming recession?
Tesla’s auto margins are much higher than the industry average and one reason they can do that is because demand outstrips their production capacity. Were Tesla producing as many cars as the market wants at current prices the above would be a valid question.
The way I see it, as Tesla ramps up production they will also have to shrink the gross margin or produce less expensive cars for a larger audience. That is probably at least a year away as the two new Giga Factories ramp uo to full production. So I don’t worry about it for now.
Denny Schlesinger
1 Like