Some of the biggest pandemic stocks are struggling in the new year which is bad news for tech companies of all sizes.
TechCrunch noted yesterday that software stocks were off to a pretty bad start to the year. It turns out that this was just the beginning of the damage. Today’s trading took another bite out of the major technology sector.
Note the following five-day chart for the WisdomTree Cloud Computing ETF, which tracks the Bessemer Cloud Index, a key measure of performance of recent software shares:
According to data from YCharts, the index closed at 46.30, or about 29% and changed from its recent all-time highs. The shift in the value of software inventory is extremely wild. The index fell today alone by 5.91%.
To feel the scale, a drop of 10% from the highs is a correction. A 20% drop is a technical bear market. And a 30% drop? I think this is called a dirty storm.
General fear versus private enthusiasm
The disconnect we discussed yesterday about private markets remaining incredibly optimistic while public markets run cooler in some of the hottest startup categories, is confirmed by today’s trading.
But it’s worth noting that there is quite a bit of impetus to the pace of startup investment today, suggesting that the stock market’s decision to revalue software stocks may take some time to reach the startup level. What do we mean? This venture capital funds have already been raised in specific dollar amounts and investment schedules. This in essence sets up a lot of big, expensive startup rounds to get through even as the exit window for the future narrows; It will be difficult to reach a bullish exit if the public markets keep their opinion variable regarding the value of program revenue.
In more down-to-earth terms, startups that are winning today, say, a Series A that they value for future revenue, poses a challenge in which they have to continue to grow at higher revenue multiples as they grow. This will become more difficult to shoot as it expands during later rounds. The closer those startups are to the scope of an IPO, the more influence the public markets will have on their ability to price their shares. Declining public prices and lackluster private valuations will get into a tangle at some point. And there are plenty of unicorns that won’t do well on the exit front if stocks continue to fall as they are.
Seems like it’s not a great start to 2022 for near-term liquidity opportunities for a local venture capitalist.