Struggling Silicon Valley startups reportedly face a potential “bloodbath” this year as cash runs low and wary tech investors flee a major downturn in the sector.
Conditions in the tech sector have gotten so rough that many embattled startups will likely be forced to raise funds from outside investors at a lower valuation – known as a “down round” – or risk running out of money entirely, industry experts told in a dire report published Monday.
“We haven’t had a compression in values like this in more than 20 years. It’s an absolute bloodbath,” Cameron Lester, global co-head of technology media and telecom investment banking at Jefferies, told the outlet.
Lester added that a “down round” is better than the alternative of going out of business.
“What matters is you’re a survivor,” Lester added.
The share of startup fundraising deals that qualified as “down rounds” hit nearly 11% in the fourth quarter of 2022, according to PitchBook data cited by .
Preliminary data for the first three months of this year placed the share of such deals at roughly 7.5%, though the number is expected to increase as more deals are closed.
Startup founders are notoriously wary of “down rounds” because any reduction in valuation erodes the on-paper value of their shares – as well as the value of investors’ stakes. Executives fear that drops in valuation will erode confidence in their brands and hurt long-term prospects.
Tech stocks have plunged over the last year.Getty Images
notes that several well-known firms, including tech fitness firm Tonal, payments firm Klarna and financial services firm Stripe are among those who have recently absorbed a hit to their valuations.
Overall, the number of venture capital funding deals hit a five-year low in the first quarter, with startups raising just $37 billion, according to data compiled by PitchBook and the National Venture Capital Association.
“We’re actually in one of the worst times in recent memory in venture activity,” AngelList CEO Avlok Kohli told . “It’s the lowest activity we’ve seen and the lowest positive activity we’ve seen.”
The tech downturn began last year as the Federal Reserve began hiking interest rates to combat inflation. Rising rates made the cost of borrowing more expensive and sent many investors to the sidelines.
Many startups are reportedly being forced to raise money at a lower valuation.Getty Images
Tech startups were dealt a major blow earlier this year with the rapid implosion of Silicon Valley Bank, the sector’s longtime preferred lender.
Prior to its collapse, SVB’s website declared that the firm “bank[s] nearly half of all US venture-backed startups, and 44% of the US venture-backed technology and healthcare companies that went public in 2022 are SVB clients.”
SVB’s downfall was preceded by major volatility in the cryptocurrency sector, with once-mighty FTX among the firms that fell into bankruptcy.
The tech-heavy Nasdaq stock index has plunged by nearly 9% since the start of the year as fear lingers within the sector.
Big Tech firms haven’t escaped unscathed. Several major players have conducted sweeping layoffs, including Google parent Alphabet, Facebook parent Meta and Amazon.