Humpty Dumpty Companies: Falling Tech Valuations

Unlike the price of eggs, valuations and the number of investments across the technology sector in the United States have fallen off and have left all of those founders and all of their management teams trying to put their businesses back together again.

Even though Powell and the Fed throughout 2022 had been both regularly increasing rates and giving guidance on where rates were likely to go, the full impact from those actions were not readily apparent. However, as data is coming in, it’s clear that not only have these actions chilled investment for both publicly and privately held companies, but they have also significantly impacted technology company valuations.

Unfortunately, the recent Fed’s warning that interest rates are likely to go higher means that it’ll get even more difficult for companies who are trying to balance themselves not to lose their balance and fall. Expect to see the trend of increased cost of capital, lower company valuations, and layoffs to continue.

However, there is one silver lining. At the end of 2022, venture capital funds in the US had $300B worth of capital that they could deploy into investments. This presents an opportunity for companies to use rough economic times for what they have always been used for: shrinking down the competitive landscape by strengthening well run companies and sloughing off badly run companies. For those companies that make it through these tough times, on the other side is investment capital waiting to be deployed into solid companies.