The Big Correction of 2022: R.I.P. Good Times (Again)
After years of rarified valuations and huge rounds, things seem to be really changing. We’re not only entering the post-COVID era at long last, but we also may be experiencing a startup (i.e., private company) correction – and perhaps a full VC pullback.
Reports in the media and from the grapevine are that Series A and B rounds have slowed down considerably. Despite the overall lethargy with A and B rounds, there are still a few “hot” investment sectors out there. These include biotech and life sciences ($720m in April according to BostInno The Beat), crypto, cybersec, and in addition, seed rounds.
In October 2008, we experienced a similar situation when Sequoia Capital called for its portfolio companies to cut expenses and prepare for leaner operations. Sequoia called it the end of good times. Sequoia warned about smaller fundraising rounds, customers being slow to purchase new technology, significantly reduced M&A activity with smaller deals, and significant narrowing of the initial public offering (IPO) pipeline.
The “R.I.P. Good Times” slide deck clearly outlined the way forward: cut costs, get profitable and “spend every dollar as if it were your last.” Sequoia stated unequivocally that it was “survival of the quickest” — as in, the quickest to slash expenses.
It turned out that they were right.
When the dot-com bubble burst in 2000-2001, Sequoia Capital made a similar assessment and sent out a clarion call to their portfolio companies with a parallel message.
They were right on that call as well.
So, what’s next for all of us now? Here are a few prognostications.
VC funds – flush with cash from 2021 and early-2022 raises – will make fewer new investments and instead, will focus more on supporting their existing portfolio companies
VCs will actively avoid 2021-style valuations on deals done in 2022
More funding will proportionally be poured into the best and strongest companies (a so-called "flight to quality” just like in the public markets)
Acquisitions of startups that can't raise funding will increase, with those companies’ larger startup rivals often being the acquirer. PE firms will thrive on this score.
The startups that follow the Sequoia directive – husbanding cash, cutting expenses, and acting quickly – will emerge as the next-generation leaders when good times return.
What happens next is anyone’s guess. Whether we’re entering a nuclear winter, a correction, or merely a reset is not yet known. Many economic indicators are positive (low unemployment, healthy consumer spending, the strong dollar, etc.) while other gauges are more negative than they’ve been in decades – such as the inflation rate and stock market valuations.
So, where does that leave us? Given all the volatility and uncertainty we’re presently experiencing, startups would be well-advised to embrace Sequoia’s wisdom about times like these – and batten down the hatches.
But I think that most of us in the tech game are optimists at heart. Many of the people I speak with believe that some tough times may well be ahead, but that more good times will come in the future. The trick is to weather this storm and stay afloat until the sun shines again. If that means taking a dose of austerity in the short- or even medium-term, then so be it.