Startup bubble fueled by Fed cheap money policy finally burst in 2023

As the last decade drew to a close, it was easy for a young engineer to hop on a Bird scooter and head to the nearby WeWork office, home to some of the hottest new crypto startups.

Then Covid came along. Electric scooters and coworking spaces are no longer a thing, but remote workers suddenly need tools that allow them to collaborate. Money has started flowing into entertainment and educational apps that consumers can use during the lockdown. And while trading cryptocurrencies.

In both eras, money was cheap and plentiful. The Fed’s near-zero interest rate policy has been in place since the 2008 financial crisis, and efforts to combat the coronavirus have added fuel to the fire, prompting investors to take risks on the next big innovation. did. And cryptocurrencies.

This year, everything unraveled. The cheap money bubble burst as the Federal Reserve raised its benchmark interest rate to a 22-year high, prolonging inflation, causing consumers to hold off and businesses to focus on efficiency. Venture investors continue to retreat from the record funding levels achieved in 2021, forcing capital-wasting startups to restructure or go bankrupt. For many companies, there was no viable solution.

WeWork and Bird filed for bankruptcy. High-value coronavirus plays like video conferencing startup Hopin and social audio company Clubhouse have been forgotten. And crypto entrepreneur Sam Bankman Fried, founder of the failed cryptocurrency exchange FTX, was found guilty of fraud, which could carry a life sentence.

Last week, Trevor Milton, the founder of automaker Nikola, was sentenced to four years in prison for fraud. His company had raised a lot of cash on the promise of bringing hydrogen-powered cars to the mass market, and was valued at more than $30 billion. December also saw the end of Hyperloop One, which cost hundreds of millions of dollars to build a tubular transportation system that would transport passengers and cargo at aircraft speeds in low-pressure environments.

More pain is certain to come in 2024 as funding for unsustainable businesses continues to dry up. But venture capitalists like Geoff Richards of GGV Capital are recognizing that the days of zero interest rate policy (ZIRP) are firmly in the past, and that blue-chip companies are outperforming and that an end is in sight. I see that there are.

On December 25th, Richards posted on “I guess so,” he wrote in a post on X (formerly Twitter). , successful management, consistent and strong growth, and a great culture. His IPO class of 25 years is coming to you. ” he finished with his two emojis. One is a smiling face and his other is a crossed fingers emoji.

It’s clear that investors are excited about the technology. The Nasdaq Composite Index is up 44% this year as of Wednesday’s close, following a 33% plunge in 2022, with the tech weight on track to close out its best year since 2003, which marked a recovery from the dot-com bust. ing.

chip manufacturer Nvidia Its value more than tripled this year as cloud companies and artificial intelligence startups acquired the company’s processors needed to train and run advanced AI models.facebook parent meta The company bounced back from a tough 2022 with a nearly 200% jump thanks to significant cost reductions and in-house investments in AI.

The 2023 washout occurred in parts of the tech economy where profits were not part of the equation. In retrospect, this calculation was predictable.

From 2004 to 2008, venture investments in the United States averaged about $30 billion annually, according to data from the National Venture Capital Association. When the Fed cut interest rates to near zero, large money managers lost the opportunity to profit from bonds, and technology drove massive global economic growth and a sustained bull market in stocks.

In search of yield, investors focused on the riskiest parts of the tech sector. From 2015 to 2019, VCs invested an average of $111.2 billion annually in the US, setting records almost every year. This craze culminated in his 2021, when venture capitalists poured more than his $345 billion into tech startups. This exceeds his total investment from 2004 to 2011.

It took a long time for WeWork to go bankrupt.Coworking space provider The company raised billions of dollars from SoftBank at a peak valuation of $47 billion, but its first attempt to go public in 2019 was a fiasco. Investors were skeptical about raising money after the company lost more than $900 million in the first half of this year. Related party transactions involving CEO Adam Neumann.

WeWork ultimately debuted in 2021 through a special acquisition vehicle without Neumann, who resigned in September 2019. However, a combination of rising interest rates and a slowdown in the return-to-office trend caused WeWork’s financial position and stock price to slump.

WeWork filed for bankruptcy in November, saying in a securities filing in August that there were “ongoing concerns” about its ability to survive. CEO David Tory said: made a plan The move is to eliminate many of the expensive leases signed during WeWork’s heyday.

Bird’s path to bankruptcy followed a similar trajectory, although the scooter company’s private market valuation reached a much lower $2.5 billion.Founded by the predecessor Uber Bird went public through a SPAC in November 2021, but quickly fell below its initial price, according to executive Travis VanderZanden.

It’s a far cry from the momentum it had in 2018, when it announced that its growth had accelerated. 10 million rides A year later, Bird’s model collapsed as investors stopped injecting cash to subsidize cheap travel for consumers.

In September, the company was delisted from the New York Stock Exchange and began trading over the counter. Bird filed for Chapter 11 bankruptcy protection earlier this month and announced that it would use bankruptcy proceedings to facilitate the sale of its assets, which it expects to complete within the next 90 to 120 days.

While the coronavirus pandemic in 2020 shocked companies like WeWork and Bird, a whole new class of companies thrived, at least for a short period of time. With the sharp rise in stock prices, zoom, Netflix and pelotonstartup investors wanted to get in on the action.

Hopin, a virtual event planning platform founded in 2019, saw its valuation increase from $1.5 billion in December 2020 to $7.75 billion by August 2021. Meanwhile, Andreessen Horowitz touted Clubhouse as the go-to app for hosting virtual sessions featuring celebrities and influencers. An idea when no one could get together in person. The company led an investment in Clubhouse in early 2021 at a valuation of $4 billion.

But Clubhouse never became a business. User growth quickly plateaued. Clubhouse announced in April 2023 that it would lay off half of its employees in order to “reset” the company.

Co-founders Paul Davison and Rohan Seth said: “As the world opens up post-COVID-19, it will be difficult for many people to find friends on Clubhouse and incorporate long conversations into their daily lives. “It has become,” he wrote. blog post.

Hopin similarly relied on people staying home and connected to their devices. Hopin founder Johnny Boufalhat told CNBC in mid-2021 that the company would go public within two to four years. Instead, its events and engagement business swallowed by ring central in August for up to $50 million.

Some recent high-profile failures have stemmed from the tech industry’s blind faith in innovative founders.

FTX collapsed almost overnight in late 2022 when customers of the cryptocurrency exchange requested withdrawals but were unable to do so due to Bankman Freed’s use of funds.Bankman Freed White Knight Veneer Big-name investors such as Sequoia Capital, Insight Partners and Tiger Global injected money without receiving anything in return and faced little scrutiny.

Nicola’s Milton attracts investors, pressis undertaking an ambitious initiative to transform the way cars drive in ways that other automakers have tried and failed in the past. In June 2020, three years after its founding, the company went public via SPAC.

Three months after its public market debut, Nikola announced: strategic partnership and general motors The company’s valuation exceeded $18 billion, well below its peak in June.

Within days of the GM deal, short seller Hindenburg Research a scathing reportMilton declared that he was spewing out a “sea of ​​lies.”

“I have never seen this level of deception, especially in a publicly traded company of this size,” Hindenburg wrote.

Mr. Milton resigned 10 days after the report, by which time parallel investigations by the Justice Department and the Securities and Exchange Commission were underway. Mr. Nikola settled with the SEC in December 2021. A week before Christmas this year, Milton was sentenced to prison for fraud.

Hyperloop One was another wild idea that never came to fruition.

The company, originally called Virgin Hyperloop, raised more than $450 million from its founding in 2014 until its closure this month.Also includes investors Sir Richard Branson’s Virgin Group, Russian sovereign wealth fund and Khosla Ventures.

However, Hyperloop One failed to win any further contracts. test site In Las Vegas, in addition to years of struggle; suspicion misconduct by executives. Bloomberg reported that the company will sell assets and lay off remaining staff.

While the emerging technology sector continues to thrive, capital markets are experiencing challenges beyond AI. Following record years in 2020 and 2021, few technology companies have gone public in the past two years.

Several tech companies’ initial public offerings (IPOs) this year generated little enthusiasm.grocery delivery company instacart went public in September at $42 per share after slashing its valuation. The stock has since fallen more than 40%, closing at $23.93 on Wednesday.

Masayoshi Son’s SoftBank, which was a major investor in WeWork and many other companies that have failed over the past few years, took chip design company Arm Holdings Inc. public in September at a valuation of $60 billion. The offering provided some much-needed liquidity for SoftBank, which acquired Arm in 2016 for $32 billion.

Arm has fared better than Instacart, with its stock up 46% since its initial public offering, closing at $74.25 on Wednesday.

Many bankers and tech investors are pointing to the second half of 2024 as the earliest opportunity for the IPO window to reopen significantly. By that point, companies will have had more than two years to adapt to the changed environment of high-tech companies, focusing on profits over growth rates, and with the expected Fed interest rate cuts in the new year as a tailwind. It might be.

For some founders, the market never closed. Adam Neumann is back at work after quitting WeWork, which was backed by billions of dollars in cash from SoftBank, in a decision his son later called “stupid.”he Raised $350 million Last year, Andreessen Horowitz launched a company called Flow. To tell The company hopes to create “superior living environments” by acquiring apartment complexes across the United States.

Neumann’s WeWork experience doesn’t count against him. In fact, it encouraged Mr. Andreessen to invest.

“We understand how difficult it is to build something like this,” Andreessen wrote. blog post About trading. “And I love seeing repeat founders build on past successes by growing from the lessons learned.”

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