Weekly Update #237: When Wall Street Sneezes (A Lot) - Will Startups Catch A Cold?
The S&P 500 fell 4.1% yesterday, one of the largest sell-offs on record. The decline follows tumultuous trading late last week, with several market observers citing fears over higher inflation and higher interest rates (bond markets have rallied in recent days) as reasons for the rout. Given that equity markets are prone to mean-reversion, it’s also possible that sentiment is cooling after a prolonged upswing in valuations since the 2008 downturn. Either way, tech was not spared in the slide, with the NASDAQ down 3.8% for the day. The S&P and NASDAQ are now down 9% and 8%, respectively, from their peaks.
S&P 500, NASDAQ Declines from Peak
One very bad day - or even a few bad days - does not necessarily make a trend; however, if the market re-rating is here to stay, what could it mean for startups?
- IPOs -- Likely to take (even more of) a breather. Companies like to issue (i.e. sell) equity when valuations are high. New IPOs can also be difficult to market to investors in a risk-averse environment. If companies don’t have an imminent need for public capital, they will likely wait for a more favorable window to sell shares to the public.
- Financing environment -- Cost of capital for startups is likely to increase. Interest rates often set the tone for other financing markets. Higher rates generally result in lower valuation multiples/higher equity capital costs. This is true in both public and private equity markets. Startups have enjoyed a robust financing environment over the past few years; low interest rates were likely a contributing factor. Higher capital costs could mean less generous funding terms going forward.
- M&A -- It could go either way. Given the sluggish IPO environment over the past two years, M&A has been an important source of startup exits. M&A is typically sensitive to the interest rate environment as higher interest rates can increase the cost of acquisitions. That said, many large tech companies are still flush with cash (see our post noting these cash stockpiles here). A less supportive VC environment (see bullet 2) could create ripe conditions for these cash-rich giants to gobble up smaller competitors at more palatable prices.
In other news…
- Apple Music has reportedly been gaining ground on Spotify in terms of its US subscribers. Spotify remains the largest music streaming service with ~70M subscribers globally; however, the news could weigh on the company’s valuation heading into its planned public offering.
- The FT reported that Buzzfeed is in discussions with Emerson Collective (led by Laurene Powell Jobs) to sell Buzzfeed News. The company did not comment on the news. A Buzzfeed board member previously suggested the company would not sell the news division; however, recent financial stumbles may have changed the board’s calculus. NBCUniversal was interested in upping its stake in Buzzfeed last summer, but talks fell through on valuation.
- Airbnb CFO Laurence Tosi left the company late last week. Tosi was an experienced public market executive, previously having served as CFO of Blackstone. Airbnb was one of EquityZen’s IPO predictions for 2018; Tosi’s departure could dampen the company’s prospects for an IPO near-term.
- DraftKings CEO suggested the company would enable sports gambling, pending broader legalization in the US. Currently, sports betting is only permitted in select markets.
- In a potential negative sign for tech M&A, the WSJ reported that the recently enacted tax repatriation holiday may not have a meaningful impact on large companies’ spending plans. We noted in our post a few weeks ago that prior repatriation holidays did not spur M&A meaningfully.
- Andrew Ng has launched a $175M AI fund. Ng, a former Stanford professor, previously led AI projects at both Google (including the famous cat video project) and Baidu. We continue to expect strong VC interest in AI going forward.
- Red Hat increased its bet on Kubernetes with the acquisition of CoreOS for $250M.