For the sake of your sanity, it’s probably best to avoid looking at your 401K…
The stock markets are going through a serious rinse cycle, and tech companies in particular are feeling the constraints of this uncertain economic environment.
It is in stark contrast to the early years of the COVID pandemic.
After all, it seemed there was no limit to the valuations and market caps of these companies since the middle of 2020. In fact, as recently as the first quarter of this year, we saw the total value of early-stage startups reach its highest level in more than 10 years.
The combination of rising interest rates, record-setting inflation, global supply chain constraints, cryptocurrency’s freefall, and a host of other factors (which we covered yesterday) set the table for a bit of an adjustment period for technology companies.
And, with murmurs of a forthcoming recession, it seems the landscape for companies has quickly shifted from “grow at all costs” to “survive at all costs.”
You see, recent years witnessed tech companies across practically all industries experience explosive growth and a seemingly never-ending supply of capital in response. In an ode to James Earl Jones in Field of Dreams, the motto might as well have been, “if you build it, they will come.”
Or, maybe you prefer the South Park angle… Phase 1: collect capital. Phase 2: ? Phase 3: profit.
Never mind escalating debts and expenditures – as long as the momentum was moving forward, business was booming.
Well, the clock appears to have struck midnight. Late-stage startups and public tech companies have been announcing layoffs left and right in anticipation of leaner times.
So, given the rampant uncertainty, it stands to reason that the life of angel investors just got a lot more complicated… Right?
Actually, not so fast.
Where large public corporations adhere to extensive and complicated organizational charts – featuring bosses of bosses of bosses – early-stage companies are far more used to making the most with less.
It was really only in the past couple years that startups became used to being courted by investors. And it’s true that the influx of interested venture capital groups and prospective angel investors slightly altered that nimble mindset for some startups that experienced ballooning valuations despite the lack of tangible results.
However, that shift is far more the exception than the rule, and the reality is that startups are playing the same game now that they always have.
Every multibillion-dollar corporation started somewhere, many from such humble beginnings as a garage.
This nimble attitude has historically been a hallmark of early-stage companies. Team members wear multiple hats and do whatever they can to ensure the company stays on its charted path and achieves its goals.
In fact, there is a growing number of venture capitalists and angel investors who feel this landscape will prove favorable.
Now that market conditions have dampened the enthusiasm surrounding investments, there is less competition for early-stage investment, which, in turn, lowers the valuations of startups seeking capital.
And, with valuations lower, the risk tolerance increases. Because at the end of the day, the state of the markets cannot change the calling card of startups: innovation.
Moreover, as large companies look to decrease costs and weather the state of public markets, they become more risk averse. This means startups are no longer jockeying with companies boasting endless cash reserves to turn these innovations into reality.
So, let’s do a quick review…
The valuations for startups are lower.
The competition for startups is lower.
I’m no mathematician, but that equation seems to favor the angel investor.
That said, it becomes more important than ever to invest in the startups that are best positioned to succeed. Those with long runways, strong founding teams and IP, in markets that forecast continued growth.
Due diligence is the key to uncovering those investment opportunities poised to grow from nimble to noteworthy.
The same due diligence we here at Angels & Entrepreneurs stake our reputation on.
We’re not swayed by glitz and glamour. We’re moved by substance.
So, while the VC and angel investor landscape shifts from buzzworthy ideas to proven results, it is business as usual inside our building.
While it’s natural to be uncertain about the state of macroeconomics, there’s no need to be uncertain about the deals we recommend.
In fact, one of the top angel investors in the world recently unveiled a mission to uncover the future of technology. Because, let’s face it, although public markets’ confidence in the state of tech is wavering, none of that changes the fact that they’ll be the backbone of modern society.
There will be giants that emerge from this warzone stronger than ever.
The Research Team