Wednesday, August 10, 2022
HomeTechnologyThe startup market is taking on more and more risk - TechCrunch

The startup market is taking on more and more risk – TechCrunch

Welcome to The TechCrunch Exchange, a weekly startups-and-markets newsletter. It’s inspired by the daily TechCrunch+ column where it gets its name. Want it in your inbox every Saturday? Sign up here
Hello from the blisteringly cold East Coast of the United States, where I am eating doughnuts to ward off the effects of my COVID-19 vaccine booster shot. Thus far the third dose of Moderna is not as bad as the second, but who knows what is coming. So we’ll stay brief today in case I fall out of my desk chair and straight into a nap midkeystroke.
To start, thank you. This little weekend newsletter now has comfortably over 30,000 subscribers, and an open rate that sits in the mid- to high-40s each week. It’s part of a larger project I kicked off at TechCrunch when I came back but was far from a settled question when we added the newsletter to the regular Exchange columns.
Frankly, I figured it was a coin flip if it would get an audience. The bet wound up paying out, and because of you, The Exchange now publishes six times weekly. That’s just good fun. Thank you.
Now, risk!
A little while back we chatted through the point that risks from the startup market are slipping more frequently into the public markets. This meant that the regular investor can now get their hands on more nascent, higher-priced startup equity than before thanks to SPACs and some, well, interesting public offerings.
But inside that point was the implicit argument that startup risk is also rising for its private market backers. Let’s talk about what is going on:
You might look at the above as a whole, and think well, maybe all those insta-unicorns and six-figure rounds make sense? It’s a somewhat comforting perspective to take. After all, the putatively smart money is taking the wager that faster, more durable growth and fewer failures — essentially that SaaS is hard to kill — will balance out higher costs to generate the sort of returns required to make venture math square up.
But, butttttttttt, there’s more and more risk being taken on because the fundamentals of the startup market have not improved much since the COVID-induced boom in software buying took off after the initial shocks of the pandemic wore off. That’s to say: The startups that venture investors are backing this year haven’t really seen their macro fortunes improve since mid-2020, but they are busy raising lots more money, lots faster. That generates increased investment risk.
There are more than 900 unicorns in the market today, all of which will need IPOs to generate the sort of return that their backers expect. If the market does finally correct a bit, just to get a little more historically aligned, quite a number of high-priced private companies could find themselves stuck in limbo between their private-market valuation and what the public markets might pay. It could get sticky. People are just betting that it doesn’t.
All this is to say that despite there being some reasonable reasons for why startup prices are going up as they also raise more capital, earlier and faster, it is hardly a zero-marginal-risk wager.
Now, go eat some leftovers and get the fuck offline.
Alex

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