The economic crisis represents a threat to startups, but at the same time, it also brings opportunities for new types of ideas. Compared to large companies, startups tend to react more flexibly.
Many of today’s giants, such as Google, Meta and Airbnb, were created or outgrew their competition during a critical period.
Startups that survive hard times tend to be more successful than ever. However, this year has certainly influenced the number of startup investments. Investors are more cautious and company valuations are lower than in 2021, which was a record year in terms of the amount of venture capital invested.
Investments in US tech startups plunged 23% in the second quarter of this year, to US$62.3 billion, the steepest fall since 2019, according to data from PitchBook, which tracks young companies. The drop in investment is interesting, especially in the startup ecosystem, which has so far grown very quickly thanks to an emerging economy, low interest rates and people using more and more technology.
Save where you can
Rising interest rates, inflation and uncertainty stemming from the war in Ukraine and other geopolitical conflicts are making investors cautious, which is having a negative impact on young technology firms.
Venture capital firms like Sequoia Capital and Lightspeed Venture Partners warned young startups to cut costs, save cash and prepare for tough times. Job cutting is a reality in large technology companies such as Snap, Facebook, Lyft and Uber, which have announced a slowdown in hiring. Companies such as Robinhood and Peloton have even announced the elimination of some job positions, reports the New York Times.
The good times may be coming to an end
Some investors and commentators are openly talking about another bubble, which may resemble the famous dot-com bubble of 1999, associated with a dramatic collapse and recession, reports CNBC. Technology shares fell during the first five months of this year, and the Nasdaq index reached its second worst quarter since the financial crisis in 2008. The well-known incubator Y Combinator, which is behind the creation of Airbnb, Dropbox and Stripe, says that the weak performance of technology companies on the market significantly affects subsequent investments.
The situation thus contrasts strongly with previous years, when investors were rushing to invest in companies. The pace was crazy, and some startups were reaching 100 times the value of their revenues.
Optimism still prevails
Some companies claim that there is still plenty of money and no collapse is imminent. Over the past decade, various market fluctuations have led to predictions that technology is in a bubble that is about to burst. Each time, however, companies have bounced back, became stronger and raised additional investment for their growth. Instead of collapsing, things got moving, the New York Times reports.
Moreover, venture capital firms remind us that great companies emerge from the darkest of times. Those that can survive and even thrive when capital is scarce are positioned to have the opportunity to flourish when the market turns around.
This blog is a shorter version of an article published on the web portal TREND in Slovak, which was created in cooperation with Eva Simekova, Associate Partner at CIVITTA and Co-founder of Challenger Accelerator.