Technology
Thursday, December 28th, 2023 5:13 pm EDT
Key Points
- Economic Shifts and Burst of the Cheap Money Bubble: The article outlines the evolution of the startup landscape, from the ease of access to cheap and plentiful money in the last decade to the disruption caused by the COVID-19 pandemic. The Federal Reserve’s near-zero interest rate policy and COVID-related stimulus efforts fueled investments in various sectors. However, in the current year, economic conditions changed as the Fed raised interest rates, leading to a burst of the cheap money bubble. The article highlights the impact of this shift, with venture investors retreating from record financing levels in 2021, leading to challenges for cash-burning startups.
- High-Profile Failures and Bankruptcies: The article cites several high-profile failures and bankruptcies in 2023, including well-known companies like WeWork, Bird, Hopin, Clubhouse, and FTX. It discusses how the downfall of these companies is attributed to changing investor sentiments, a focus on profitability, and the failure of some startups to adapt to new economic conditions. The demise of automaker Nikola and Hyperloop One also serves as examples of companies that raised substantial funds but faced challenges in delivering on their promises.
- Tech Industry Reckoning and Optimism for the Future: The article acknowledges a reckoning in the tech industry, where excessive funding went to companies with unsustainable business models, particularly those lacking profitability. Despite the challenges and failures, there is optimism for the future. Venture capitalists anticipate the emergence of a new crop of well-run companies with consistent growth, marking the end of unsustainable “ZIRP unicorns.” The article points to the excitement among investors about the tech sector, with the Nasdaq Composite rebounding in 2023. Chipmaker Nvidia and Meta (formerly Facebook) are cited as examples of tech companies that performed well amid the challenges.
The article discusses the shifting landscape of venture capital and technology investments, highlighting the contrast between the past decade and the current state of the industry. The last decade was characterized by abundant capital, with the Federal Reserve’s low-interest rate policy and Covid-related stimulus measures fueling investments in various sectors, including electric scooters, co-working spaces, and crypto startups. However, in 2023, the scenario changed dramatically as the Fed raised interest rates, leading to a burst of the cheap money bubble. Many startups, previously backed by significant funding, faced challenges, and several high-profile companies, such as WeWork, Bird, and FTX, filed for bankruptcy or encountered financial troubles.
The article emphasizes the impact of the changing economic environment on different sectors. For instance, the electric scooter company Bird, which once reached a valuation of $2.5 billion, filed for Chapter 11 bankruptcy protection due to a lack of sustained investor support. WeWork, once valued at $47 billion, faced a similar fate, also filing for bankruptcy. The downfall of these companies is attributed to a shift in investor sentiment, with a focus on profitability over growth.
The article highlights the broader trend of reevaluation in the tech industry, where the lack of profits in many startups became apparent. It traces the evolution of venture investments, indicating that from 2015 to 2019, venture capitalists invested an average of $111.2 billion annually in the U.S., reaching a peak in 2021 with over $345 billion invested in tech startups. However, this excessive funding often went to companies with unsustainable business models, leading to a reckoning in 2023.
The failures extend beyond traditional tech companies, with examples like Nikola, an automaker that promised hydrogen-powered vehicles, and Hyperloop One, which aimed to revolutionize transportation through tube-based systems. Both companies faced challenges and ultimately failed to deliver on their ambitious promises.
Despite the challenges and failures, the article suggests that there is optimism for the future. Some venture capitalists anticipate a shift toward a new crop of well-run companies with consistent growth, predicting that 2024 will mark the end of unsustainable “ZIRP unicorns” and the rise of a more sustainable class of startups. The article concludes by noting that the second half of 2024 is seen as a potential reopening of the IPO window, allowing companies to adapt to the changed environment and prioritize profitability over growth.
For the full original article on CNBC, please click here: https://www.cnbc.com/2023/12/28/startup-bubble-fueled-by-fed-cheap-money-policy-finally-burst-in-2023.html
