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Tech executives expect higher interest rates, layoffs and layoffs

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Guillaume Pouzaz, CEO and founder of payment platform Checkout.com, speaking on stage at the Web Summit 2022 tech conference.

Horacio Villalobos | Getty Images

LISBON, Portugal — The wings of a once-tech unicorn are being clipped as the era of easy money ends.

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’s time to rein in spending and focus on the basics.

“What is certain is that the fundraising landscape has changed,” said Guillaume Pouzaz, CEO of London-based payments software company Checkout.com, during a panel moderated by CNBC.

Last year, a small team was able to share a PDF deck with investors and raise $6 million in seed funding “instantly,” according to Pusaz, a clear sign of the glut of venture deals.

In January, Checkout.com’s valuation nearly tripled to $40 billion after a new round of equity capital. In 2020, the company reported revenue of $252.7 million and a pre-tax loss of $38.3 million, according to a statement from the company.

When asked what his company’s valuation would be today, Puzaz said, “The valuation is what investors need, who care about the entry point and the exit point.”

“Last year’s ratios are not the same as this year’s,” he added. “We can look at the public markets, valuations are basically half of what they were last year.”

“But I would almost tell you that I don’t care at all because I care where my income goes, and that’s the main thing,” he added.

Growth in the cost of capital

Valuations of private technology companies are under enormous pressure amid rising interest rates, high inflation and the prospect of a global economic downturn. The Fed and other central banks are raising rates and reversing pandemic-era monetary easing to prevent inflation from soaring.

That led to a sharp pullback in high-growth tech stocks, which in turn hit private startups that raise money at discounted valuations in so-called “down rounds.” Companies like Stripe and Klarna are down 28% and 85% respectively this year.

“What we’ve seen over the last few years is a value of money that has been zero,” Puzaz said. “This happened very rarely in history. Now the value of money is high and will grow.”

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Higher rates spell trouble for much of the market, but they represent a notable setback for money-losing tech companies. Investors value companies based on the present value of future cash flow, and higher bids reduce the amount of expected cash flow.

Pusaz said investors have yet to find a “floor” to determine how much the cost of capital will rise.

“I don’t think anyone knows where the floor is,” he said. “We need to get to the top end to then decide and start forecasting what the bottom end is, which is the long-term residual value of capital.”

“Most investors to this day make valuations based on DCF, discounted cash flow, and for that you need to know what the residual downside is. Is it 2% or 4%? I wish I knew. ‘t.”

“The whole industry is ahead of its skis”

A common thread of conversation at Web Summit was the relentless wave of layoffs that has hit the big tech companies. Payment firm Stripe dismissed 14% of employees, or about 1100 people. A week later, the owner of Facebook Meta cut 11 thousand jobs. Amazon is reportedly planning to lay off 10,000 workers this week.

“I think every investor is trying to push this into their portfolio companies,” Tamas Kadar, CEO of fraud prevention startup Seon, told CNBC. “They usually say that if a company isn’t really growing, it’s stagnant, then try to optimize profitability, increase gross margin numbers and just try to just extend the runway.”

According to Kadar, the activity of venture deals is decreasing. He said venture capital has “hired so many people” but many of them “are just talking and not really investing as much as they used to.”

Not all companies will survive the looming economic crisis — some will fail, according to Par-Jørgen Parson, a partner at venture capital firm Northzone. “In the coming months, we’re going to see spectacular failures” of some highly valued unicorn companies, he told CNBC.

Tech companies have a

In 2020 and 2021, investors took advantage of the sufficient liquidity in the market. Thanks to societal shifts caused by Covid-19, such as working from home and the increased use of digital technology, technology has benefited greatly.

As a result, programs that promise delivery of products in less than 30 minutes and fintech services that allow consumers to buy goods with no upfront costs and almost anything related to cryptography have raised hundreds of millions of dollars at multi-billion dollar valuations.

At a time when monetary stimulus is winding down, these business models have been tested.

“The whole industry got ahead of its skis,” Parson said in an interview. “This was largely driven by the behavior of hedge funds, where the funds saw a sector that was growing, got access to that sector, and then bet on a number of companies in the hope that they would become market leaders.”

“They pushed the grade like crazy. And the reason it was able to do that was because there were no other places to go with the money at the time.”

Mael Gave, CEO of the startup accelerator program Techstars, agreed and said some later-stage companies “were not built to be sustainable at their current size.”

“Reduction may not always be possible, and frankly, for some of them, even repayment may not be a viable option for outside investors,” she told CNBC.

“I expect a certain number of late-stage companies to virtually disappear.”

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