The collapse of the technology sector is a purge, not a crisis

After a series of “super-illustrative” meetings with shareholders, Uber CEO Dara Khosrowshahi sent a striking email to employees on Sunday night: “We need to show them the money.”
Using metaphors incorrectly, Khosrowshahi explained, the market is undergoing a “seismic shift” and that the “goal posts have changed”. The priority of a taxi ordering and food delivery service company should be to generate free cash flow. Khosrowshahi wrote: “We serve trillions of dollars in markets, but the size of the market would be irrelevant if it does not translate into profit.”
For the head of Uber, it’s not as likely to talk out loud about cash flow and profit as Elon Musk’s talk about the benefits of personal humility and petrol cars. No company is more indicative of a long, crazy bull market, filled with capital in technology stocks. The company, which was founded in 2009, was founded a decade later at a valuation of $ 76 billion. Its late turn to the traditional financial approach shows exactly how many markets have shifted since the shift in the interest rate cycle and the collapse of the technology-laden Nasdaq market, which has fallen by 26 percent this year.
As always, when bubbles burst, it is difficult to distinguish between temporary adjustment and permanent change, between cyclical contraction and permanent trend. Has the speculative foam just dumped at the top of the market? Or have the rules of the game changed drastically for venture capital backed businesses trying to emulate Uber? My bet is on the last point, and that may not be a bad thing.
There is certainly a strong argument that the extraordinary boom in technology stocks over the past decade has been largely driven by policies of low interest rates to unprecedented levels in response to the global financial crisis of 2008. With capital becoming a commodity, it made sense for opportunistic companies to grab as much money as you can from venture capital firms to “scale quickly” and make their way to market dominance.
This crazy expansion has been accelerated by funding a new class of unorthodox investors, including “multi-interest” hedge funds like Tiger Global. Such funds are now seeing a staggering decline in the valuation of their investment portfolios. Tiger Global lost $ 17 billion this year.
“There is a unique set of economic and financial policies put in place by the world’s central banks that we have not seen before, which maintains negative interest rates over the long term,” says veteran investor William Janeway. Consequently, he says, some companies have pursued “capital as strategy” and tried to achieve success by investing and ignoring traditional criteria. “But I do not think it is a reasonable or sustainable investment strategy.”
Stock market investors came to the same conclusion and now distinguish between technology companies that generate strong cash flow and profits, such as Apple, Microsoft and Alphabet, and investments that are more speculative, such as Netflix, Belton and Zoom: This may have grown extremely fast during the COVID 19 pandemic, but it still takes a toll.
Just as investors in the public market are shifting from cash-intensive growth stocks to value-creating companies, so are private market investors following their lead, says Albert Wenger, managing partner at Union Square Ventures, a venture capital firm in New York. “I think it’s healthy. Companies need to build real products and deliver value to customers that are turned into profits,” even though this transformation is “extremely painful for a number of companies.”
Life has already become uncomfortable for beginners who have financial resources to rely on. It is now difficult to gain access to public markets. According to EY, the value of all global IPOs fell 51 percent year-on-year in the first quarter of 2022. The market, obsessed with special-purpose buyouts that have allowed speculative high-tech companies to list through the back door, is now completely frozen. Valuations of delayed funding rounds have now dropped in the US, and the rest of the world has followed suit.
Despite this, the venture capital industry is still full of money and desperate to invest. According to KPMG, some 1,400 venture capital funds raised a total of $ 207 billion worldwide last year.
Although cash will have a significant impact, the ability of beginners to exploit opportunities with inexpensive and powerful tools such as open source software, cloud computing and machine learning applications remains unaffected. a slowdown in the aggressive hiring plans of big technology companies could persuade more emerging entrepreneurs to try it. “We increasingly need goal shots from an investment and societal perspective,” says Wenger. There is still a huge demand for climate technology start-ups to come up with smarter ways to reduce energy consumption, for example.
Venture capital-backed companies may have just navigated the most exotic and wealth-generating bull market in history. Such supernatural conditions will never happen again. What follows is more likely a purification than a crisis.

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