February 2, 2023

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Will record dry powder levels spark a delayed explosion in startup investment? • TechCrunch

Raphael Mukomilow Contributor

Raphael Mukomilow is Partner and Head of Growth at Picus Capital. His focus is on later-stage and growth investing.

Pierre Bourdon Contributor

Pierre Bourdon is an investor at Picus Capital.

After the challenging year of 2022, one might think that the coming months do not look good for VCs or founders.

But “Dry Powder” — money raised from VCs that hasn’t yet been deployed — has soared to record levels. Venture capital investors in the United States, for example, are sitting on a $290 billion powder keg poised to ignite a new wave of tech startups.1 Investors are understandably wary. But if managed wisely, the payoff could be large, especially since valuations have drastically normalized.

But why did this happen and what does it mean for the tech industry? And why does the current market environment offer an unprecedented opportunity for investors?

Tech stocks experience significant valuation corrections

Tech stocks have endured a storm over the past year.

The Nasdaq composite index is down 32% since last January. For example, Meta, Amazon, Netflix, and Google have seen their stocks plummet 63%, 45%, 48%, and 34%, respectively, since the beginning of 2022. For these four stocks alone, such a drop represents a $2.3 trillion drop in market value — that’s 1.4 times the cumulative market capitalization of all 40 companies in the TecDAX, Germany’s largest stock market index.2

A freeze on funds, skyrocketing layoffs, inflation and a recession have prompted some pundits to dub the troubled climate a “startup apocalypse.”

These declines were due to a correction in the valuation ratios. In 2021, the average enterprise value for publicly traded cloud software companies was at times 20 times NTM revenues. Since the valuation revision in early 2022, multiples have normalized and are now around 5x to 10x NTM sales.3

But last year’s downturn has also hit private market startups. The average valuation of Series C rounds fell by about a third to $336 million in Q2 2022 from $500 million in Q4 2021.4

Lack of funding, skyrocketing layoffs, inflation and a recession have led some pundits to dub the troubled climate a “startup apocalypse.” But despite these challenging circumstances, tech trends are showing hope.

The technology sector has proven resilient

The rapid growth of cloud and AI has kept key technology trends stable, largely due to huge shifts in the way we work. Spurred on by the need to ensure they are future-proof, organizations have poured money into modernizing their digital infrastructure and processes.