Guillaume Pousaz, CEO and founding father of payment platform Checkout.com, speaking onstage on the 2022 Web Summit tech conference.
Horacio Villalobos | Getty Images
LISBON, Portugal — Once high-flying tech unicorns at the moment are having their wings clipped because the era of easy money involves an end.
That was the message from the Web Summit tech conference in Lisbon, Portugal, earlier this month. Startup founders and investors took to the stage to warn fellow entrepreneurs that it was time to rein in costs and deal with fundamentals.
“What’s obviously is that the landscape of fundraising has modified,” Guillaume Pousaz, CEO of London-based payments software company Checkout.com, said in a panel moderated by CNBC.
Last yr, a small team could share a PDF deck with investors and receive $6 million in seed funding “immediately, ” in line with Pousaz — a transparent sign of excess in enterprise dealmaking.
Checkout.com itself saw its valuation zoom nearly threefold to $40 billion in January after a latest equity round. The firm generated revenue of $252.7 million and a pre-tax lack of $38.3 million in 2020, in line with an organization filing.
Asked what his company’s valuation can be today, Pousaz said: “Valuation is something for investors who care about entry point and exit point.”
“The multiples last yr will not be the identical multiples than this yr,” he added. “We are able to take a look at the general public markets, the valuations are mostly half what they were last yr.”
“But I might almost let you know that I do not care in any respect because I care about where my revenue goes and that is what matters,” he added.
Rising cost of capital
Private tech company valuations are under immense pressure amid rising rates of interest, high inflation and the prospect of a world economic downturn. The Fed and other central banks are raising rates and reversing pandemic-era monetary easing to stave off soaring inflation.
That is led to a pointy pullback in high-growth tech stocks which has, in turn, impacted privately-held startups, that are raising money at reduced valuations in so-called “down rounds.” The likes of Stripe and Klarna have seen their valuations drop 28% and 85%, respectively, this yr.
“What we have seen in the previous couple of years was a value of cash that was 0,” Pousaz said. “That is through history very rare. Now now we have a value of cash that’s high and going to maintain going higher.”
Higher rates spell challenges for much of the market, but they represent a notable setback for tech firms which can be losing money. Investors value corporations based on the current value of future money flow, and better rates reduce the quantity of that expected money flow.
Pousaz said investors are yet to seek out a “floor” for determining how much the fee of capital will rise.
“I do not think anyone knows where the ground is on the upper hand,” he said. “We want to achieve the ground on the upper hand to then resolve and begin predicting what’s the lower end, which is the long run residual cost of capital.”
“Most investors do valuations still to at the present time on DCF, discounted money flow, and to do this that you must know what’s the residual floor on the downside. Is it 2%, is it 4%? I wish I knew. I do not.”
‘A complete industry got ahead of its skis’
A standard topic of conversation at Web Summit was the relentless wave of layoffs hitting major tech corporations. Payments firm Stripe laid off 14% of its employees, or about 1,100 people. Per week later, Facebook owner Meta slashed 11,000 jobs. And Amazon is reportedly set to let go 10,000 employees this week.
“I believe every investor is attempting to push this to their portfolio corporations,” Tamas Kadar, CEO of fraud prevention startup Seon, told CNBC. “What they sometimes say is, if an organization shouldn’t be really growing, it’s stagnating, then attempt to optimize profitability, increase gross margin ratios and just try to only lengthen the runway.”
Enterprise deal activity has been declining, in line with Kadar. VCs have “hired so many individuals,” he said, but lots of them are “on the market just talking and not likely investing as much as they did before.”
Not all corporations will make it through the looming economic crisis — some will fail, in line with Par-Jorgen Parson, partner at VC firm Northzone. “We’ll see spectacular failures” of some highly valued unicorn corporations within the months ahead, he told CNBC.
The years 2020 and 2021 saw eye-watering sums slosh around equities as investors took advantage of ample liquidity available in the market. Tech was a key beneficiary due to societal shifts led to by Covid-19, like working from home and increased digital adoption.
Consequently, apps promising grocery delivery in under half-hour and fintech services letting consumers buy items with no upfront costs and virtually anything to do with crypto attracted a whole bunch of thousands and thousands of dollars at multibillion-dollar valuations.
In a time when monetary stimulus is unwinding, those business models have been tested.
“A complete industry got ahead of its skis,” Parson said in an interview. “It was very much driven by hedge fund behaviour, where funds saw a sector that’s growing, got exposure to that sector, after which bet on plenty of corporations with the expectation they might be the market leaders.”
“They pushed up the valuation like crazy. And the rationale why it was possible to do this was because there have been no other places to go together with the cash on the time.”
Maelle Gavet, CEO of pre-seed investment firm Techstars, agreed and said some later-stage corporations were “not built to be sustainable at their current size.”
“A down round will not be at all times possible and, frankly, for a few of them even a down round will not be a viable option for external investors,” she told CNBC.
“I do expect a certain variety of late stage corporations principally disappearing.”
