The 2022 startup market might feel like a slowly unfolding train wreck, but there’s good news to be found — provided you are willing to take a longer-term perspective.
Sure, startup layoffs are spiking, venture capital is slowing, and the stock market is a hot mess. Underneath each drumbeat of negativity, however, there’s more positivity than you might expect. And, extracting one more nugget from the recent Battery Venture quarterly cloud update, the doomsayers are ignoring history.
So this fine weekend, let’s find the sunshine amid the clouds. Get it? Clouds. OK, no more SaaS dad jokes. To work:
Founders, here’s the good software news
The good news is a variation of the bad news and is often positive thanks to historical comparisons. Sure, this is good news of a sort, but it’s welcome all the same:
- The Bad News: Startup layoffs are spiking.
- The Good News: Far less than in early 2020.
As Homebrew’s Hunter Walk noted recently on his personal blog, startup layoffs hit a local maximum last month, reaching 16,000 and change, per the Layoffs.FYI tracker. Given that the same data service recorded effectively zero startup layoffs during the Q3-Q4 venture boom, the figure is bad. But! It’s also far less bad than the damage startups endured in early 2020.
For example, startup layoffs reached nearly 10,000 in March 2020. And then for months, they stayed hot, with more than 25,000 recorded in both April and May of the same year. Just 70 individual startup layoff events were noted by Layoffs.FYI in May 2022, far fewer than the more than 100 per month recorded from March through May 2020.
Things are worse than they were in late 2021 from a startup staffing cut perspective, but we’re hardly setting records here, even looking just at recent data.
- The Bad News: Venture capital is slowing.
- The Good News: From historically record levels.
By now you are bored with TechCrunch noting that 2021 was a record-setting venture capital year. You may also have tired of notes from media, investors and the technology chattering class that venture investment has collapsed. Only, really, it hasn’t. A decline from all-time highs doesn’t necessarily mean doldrums. It can mean a more measured drumbeat of capital disbursements.
Just this week, for example, TechCrunch noted that the battered crypto sector is seeing less investment month on month but still raking in dollars at impressive year-on-year levels:
Total venture capital funding in the crypto space fell 38% from $6.829 billion in April to $4.219 billion in May, according to Dove Metrics data. Even though the amount of capital deployed into crypto is down in the short term, it’s significantly higher than levels from a year ago: The amount of capital invested in the space last month increased 89% from $2.233 billion in May 2021.
While it is too early to put a cap on Q2 2022 data, and there are signs of weakness easily found, we are still seeing huge venture capital totals put to work today. For founders building material concerns, there’s still money out there. It just isn’t as cheap or readily available.
- The Bad News: The stock market is a mess.
- The Good News: Valuations are still above historical norms.
As I am the resident TechCrunch stock market dweeb, you may be worried that I am about to drag you through a mile of data. Your concern is well founded. Let’s talk numbers.
Tech stocks have taken a withering assault in recent months. The Nasdaq Composite is off 26% from recent all-time highs as I write to you on Friday afternoon. The Bessemer Cloud Index is off an even sharper 53%. And yet, valuations are holding up.
Recent Battery Ventures data relating to Q1 — now somewhat dated, but directionally useful all the same — makes this fact plain:
Let me help you read those charts. First, skim the top dataset, which shows how public software companies’ forward (NTM, or next-12-months) revenue multiples expanded during the boom. Note that multiples expansion was not uniform, varying as it did along growth bands.
Now, the lower left box. This shows how insane things got in 2021 when compared to a median valuation mark set during the preceding half-decade. The box on the lower right is the same calculation but using Q1 2022 data. What can we see? A few things:
- Multiples are still largely above historical norms. For startups, this is good news; they were still raising capital in a market during the first quarter that was generally more richly priced than what we saw during the buildup to the 2021 market peak.
- A growth premium remains in effect. Even better, the faster a company is growing, the greater its premium to historical prices we see. As startups are growth oriented, this is a tremendous tailwind.
- It is, however, tough out there for slow-growing SaaS. The only real downside in the above data is the simple fact that slow-growing software companies have actually lost ground compared to prior norms.
Naturally, looking at software companies creates a comp that better fits the software startup cohort, but given that nearly every startup creates software, our overall comparison point is neither egregious nor specious.
Thus concludes our look at the other side of the downturn coin. Sure, things are worse, but they are far from bad. And that’s something to hold on to.
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