Tech sell-off: record fundraising has given start-ups breathing space

Investment in tech companies is stalling as valuations fall. Tech stocks are dragging markets lower, pushing the Nasdaq index down 24 per cent this year. Shares in Snap have crashed by two-thirds and Amazon by nearly a third. But start-ups still have reason to be hopeful.

Forecasters believe demand for the tech products and services they provide will increase this year. Despite rising inflation and geopolitical disruption, Gartner is predicting a 4 per cent rise in global spending on IT services and products to $4.4tn. Analytics, cloud computing and security groups should benefit most.

Shrewd start-ups re-evaluated their spending during the pandemic. In March 2020, venture capital firm Sequoia warned founders to think carefully about their cash flow, headcount and capital spending.

But the biggest protection is fundraising. In the first quarter of 2022, global start-ups raised a record sum, according to recent data from CB Insights. Investment in blockchain start-ups alone topped $9bn in the first three months of the year.

PitchBook statistics record a year-on-year decline in US venture capital investment in the first quarter at $70bn. But investments during 2021 were $330bn, double the amount in 2020 and four times as much as five years ago.

The financing glut will help tech companies in a period where primary markets are closed or open only on disadvantageous terms.

Companies that joined markets last year, including fintechs Coinbase, Robinhood, Toast and Marqueta, trade well below their listing price. Prices could fall further. Valuations remain elevated in spite of the sell-off. The Shiller price-to-earnings ratio, also known as the cyclically adjusted p/e ratio (CAPE), has fallen this year. But at 32 it is still twice the historic average.

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So far, start-ups are showing signs they do not need to attempt forced market listings to raise funds. In the space of three months, global markets saw just 321 initial public offerings — down more than a third from the same period last year, according to EY. By gathering funds from private markets when they could, start-ups have bought themselves time.