The Endgame


Public tech stocks have gone from bad to worse.

The NASDAQ Composite Index is down 22% since the start of the year. It’s fallen more than 5% already today.

After a fleeting surge in late March, it looks like the tech downturn is here to stay. Interest rates, not the pandemic, are bringing the party to an end.

Private market investors have gotten the message.

But startup founders aren’t all ready to hear the bad news: their startups are worth less than they’re willing to admit. But, if they’re lucky, they’ve got enough cash in the bank to ignore the world trembling around them. Venture capitalists on their boards are recommending layoffs. Late stage private investors are sitting on their hands, waiting for valuations to fall further.

Last year’s frothy valuations are so quickly forgotten.

As one investor told me, funding rounds this year will be tough: “The great companies are going to be flat. The good companies are going to have to be open-minded to some down rounds.”

The bad companies, good luck.

Layoffs all around.

I’ve been catching up with top investors. And, I’ve been tracking the moods of the private startup market long enough to have a feel for the ups and downs.

So I’m going to sketch out what’s happened in the last 18 months in Newcomer market analysis, then tell you where we are today, and finally sketch out how things might play out from here.

How we got here

Winter, Late 2020 / Early 2021

Silicon Valley stocks were soaring even as the world faced a devastating global pandemic.

With the spread of the coronavirus, Sequoia had warned founders about the potential for a “black swan” event.

Instead, the global lockdowns sparked one of the greatest bull markets in tech stocks.

Interest rates were low and everyone was on Zoom.

Late stage investor Altimeter was flying high. I scooped that the firm had led aggressive rounds in Cockroach Labs and Workato. Investors were taking their turns building a reputation for paying astronomical prices.

Back in December 2020, free cash flow didn’t matter anymore.

Money-losing companies like DoorDash and Uber — along with plenty of SPACs — were soaring. Uber’s stock neared an all-time high (it’s basically halved since then).

There should be a Silicon Valley version of the emperor has no clothes fable. It starts off the same way — the emperor wearing no clothes and his sycophantic supporters telling him that his robes look magnificent. But in Silicon Valley, the emperor seizes on the mania, raises a bunch of money from his acquiescent followers, and begins work on new magical garments. Maybe in a few years, with a little work, the robes will be real this time. If you doubted the emperor, you were a fool for finding fault in the present instead of grasping the possible.

And Silicon Valley had weathered a “nuclear winter” in consumer startups. Investors’ optimism didn’t seem to be grounded in anything particular.

I wrote in a story,

While the pandemic seems to be driving tech adoption, I also think that there’s a sense that investors just decided to like consumer investing again. They gave up on waiting for a platform, concluded that people were sick of Facebook, and started cutting checks. They learned to stop worrying and love consumer apps.

In February 2021, I headlined an article, ‘It Is Fucking Madness’: The SaaS Market.

Tiger Global took Silicon Valley by storm, driving up prices as every other investor scrambled to react.

These days, rivals say Tiger Global is spraying and praying, anointing new unicorns, years ahead of when those companies might have earned their horn in more normal times. Tiger’s defenders say that it’s a sophisticated private investor that does serious diligence and has a long track record of success.

“What they’re doing is buying an index of software,” one of Tiger’s rivals told me. “If you’re buying an index of software right now, it’s pricey. They’re flooding the zone with term sheets.”

Summer, 2021

By the summer, with deep pockets and unlimited optimism, investors were diving head first into early consumer companies with few metrics.

Popshop and Poparazzi earned headlines as Benchmark and Andreessen Horowitz competed to lead the buzzy deals. In 2021, Andreessen poured money into Clubhouse and Substack.

I reported that Andreessen Horowitz secretly invested in an under-the-radar French company called BeReal.

People were praying for “hot vax summer” and the money was flowing to will the next generation of social apps into being.

Marking the public listing for Coinbase and Robinhood, I wrote:

Two of the most high-profile public listings this year have been for companies that facilitate financial speculation.

That seems worth chewing on.

Coinbase mounted the seventh biggest listing of all-time in April. Robinhood went public just last week, and its stock price surged this week.

This is an era of meme stocks and r/WallStreetBets, a time when Kodak’s stock temporarily claimed relevance, and when GameStop fended off short interest. The S&P 500 is up 32% in the past year and more than 100% over the past five years. Cathie Wood’s Ark Investment Management, which bets on speculative “disruptive innovation” companies, is the investor of the moment. Meanwhile, Bitcoin is trading above $40,000 when a year ago it went for less than $13,000.

I’m not writing this piece to call a bubble. If a pandemic couldn’t derail the market’s upward march, it’s hard to know what would. The market will do what it will. Overall, I believe that the technology industry generates more than enough legitimately innovative companies — Amazon, Google, Apple, Stripe, Square, etc. — that I believe in the long-term value of the technology industry overall. But, of course, lofty valuations for delusional technology companies help drive up valuations for even the most reality-based of companies.

Before any bubbles burst, I want to plant a flag in the ground that the bulls won, even if the market collapses. If the market turns and SPACs, crypto hustlers, and speculative, money-losing businesses falter or collapse, I don’t want to have to stomach all the retrospective recriminations. Gambling in the casino, you say?!

Fall, 2021

The private markets continued into a frenzy. It was a fun time to break funding scoops.

Companies had raised two or even three funding rounds in a single year. Even closely held companies like Tegus were relenting and taking capital.

At those prices, how could you not?

The peak came on November 17. The NASDAQ composite hit its all-time high. That same day, I published an ominous article about private market valuations, titled, “Raising More With Less.”

I documented nine companies that had raised at unicorn valuations with less than $10 million in annual recurring revenue. One of the CEOs emailed me to ask me about the story, “Is your take that the investors are crazy or that these companies must have something really exciting going on? :)”

In that same article, I broke the news that white board company Miro — a company that had benefited from the work-from-home world of the pandemic — was raising at a decacorn valuation. That deal, which ultimately valued Miro at $17.5 billion, could end up ranking as the frothiest in a frothy time for a SaaS startups.

I wrote that founders were playing with fire,

“Investors are logically shooting for the company that could be the next Snowflake, the next decacorn,” says Nick Mehta, the CEO of SaaS company Gainsight. “But for some of those companies that never make it to that status but are still good businesses — they’ll be stuck with a high valuation and high 409a and won’t be able to get back to that valuation for 5, 7, 10 years.”

That could make it hard to hire and retain employees. And employees who join after an astronomical valuation could eventually find their options underwater.

For an unlucky subset of these companies, Mehta said, “It will be a little bit like a zombie existence where you feel like you’re treading water.”

It would be downhill from there.

Winter, Late 2021 / Early 2022

We entered a period where the private markets tried to gauge whether the downturn would be permanent.

I wrote in January after public equities had started to fall, Here's What Investors Think the Treacherous Public Markets Mean for Private Startups.

Many of those predictions hold up well with the benefit of hindsight:

  • Many investors feel that companies were truly overvalued.
  • Crossover investors like Tiger Global and Coatue could shift even more of their private market investing to Series A and Series B companies.
  • Early stage rounds will be the last to adjust.
  • It only takes a few crazy investors to ignore the public market correction.

Today and Looking Forward

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