Guillaume Pouzaz, CEO and founder of payment platform Checkout.com, speaking on stage at the Web Summit 2022 technology conference.
Horacio Villalobos | Getty Images
LISBON, Portugal — Once high-flying tech unicorns now have their wings clipped as the era of easy money comes to 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 their fellow entrepreneurs that it’s time to rein in costs 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, on a panel moderated by CNBC.
Last year, a small team could share a PDF deck with investors and get $6 million in seed funding “immediately,” according to Pousaz—a clear sign of excess in venture deals.
Checkout.com itself saw its valuation nearly triple to $40 billion in January after a new round of capital. The firm generated revenue of $252.7 million and a pretax loss of $38.3 million in 2020, according to a company filing.
Asked what his company’s valuation would be today, Puzaz said: “The valuation is something for investors who are interested in the entry point and the exit point.”
“The multipliers last year are not the same multipliers as this year,” he added. “We can look at the public markets, valuations are almost half of 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 what’s important,” he added.
The rising 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 Federal Reserve and other central banks are raising interest rates and reversing pandemic-era monetary easing to head off rising inflation.
That has led to a sharp pullback in high-growth tech stocks, which in turn has weighed on private startups raising money at discounted valuations in so-called “down rounds.” Companies like Stripe and Klarna have seen their ratings drop by 28% and 85% respectively this year.
“What we’ve seen over the last few years was a cost of money that was 0,” Puzaz said. “This is very rare in history. We now have a cost of money that is high and will continue to grow.”
Higher rates pose challenges for much of the market, but they represent a notable obstacle for money-losing tech firms. Investors value companies based on the present value of future cash flow, and higher rates reduce the amount of that expected cash flow.
Pousaz said investors have yet to find a “bottom line” to determine how much the cost of capital will rise.
“I don’t think anybody knows where the floor is above,” he said. “We need to bottom out on the upside to decide and start predicting what the lower bound is, which is the long-term residual cost of capital.”
“Most investors to this day do DCF valuations, discounted cash flows, and to do that you need to know what the residual downside is. Is it 2%, 4%? I wish I knew. ‘T.”
“An entire industry has outgrown its skis”
A common topic of conversation at Web Summit was the relentless wave of layoffs hitting big tech companies. Payments firm Stripe has laid off 14% of its workforce, or about 1,100 people. A week later, Facebook owner Meta cut 11,000 jobs. Amazon is reportedly laying off 10,000 workers this week.
“I think every investor is trying to push this to their portfolio companies,” Tamas Kadar, CEO of fraud prevention startup Seon, told CNBC. “What they usually say is if a company isn’t really growing, it’s stagnant, then try to optimize profitability, increase gross margin ratios and just try to extend the runway.”
According to Kadar, activity on risky transactions is decreasing. VCs have “hired so many people,” he said, but many of them are “just talking and not investing as much as they used to.”
Not all companies will make it through the looming economic crisis – some will fail, according to Par-Jørgen Parson, a partner at venture capital firm Northzone. “We’re going to see spectacular failures” of some highly valued unicorn companies in the coming months, he told CNBC.
2020 and 2021 saw impressive sums around the stock as investors took advantage of the market’s immense liquidity. Technology has been a key beneficiary thanks to societal changes brought on by Covid-19, such as working from home and increased digital adoption.
As a result, apps promising grocery delivery in less than 30 minutes and fintech services allowing users to buy items with no upfront costs and virtually anything crypto-related have raised hundreds of millions of dollars at billion-dollar valuations .
At a time when monetary incentives are weakening, these business models are being tested.
“An entire industry got ahead of its skis,” Parson said in an interview. “It was largely driven by the behavior of hedge funds, where the funds saw a sector that was growing, got exposure to that sector and then bet on a number of companies with the expectation that they would be market leaders.”
“They pushed the grade like crazy. And the reason it was possible to do that was because there were no other places for the money to go at the time.”
Maëlle Gavet, CEO of startup accelerator program Techstars, agreed and said some late-stage companies “are not built to be sustainable at their current size.”
“A down round may not always be possible and, frankly, for some of them, even a down round may not be a viable option for outside investors,” she told CNBC.
“I really expect a number of late-stage companies to disappear.”