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Is this the sound of a bubble deflating? Where are we in the cycle?

The equivalent of Australia’s GDP – $US2.3 trillion – was lost as the share prices of 75 well-known tech companies fell from their peaks. Tech stocks were down 46 per cent, and many high profile public stocks, from Peloton to Robinhood, Zoom and Pinterest, were down 70-90 per cent. Not even crypto was safe, as Bitcoin fell by 50-70 per cent.

Is this the sound of a bubble deflating? Where are we in the cycle? Will tech rebound with a V-shaped recovery as it did in 2020? Or will it crater like it did in 2000?

I’ve been asked these questions and many more by investors and entrepreneurs. And fair enough. Investors have entrusted us to be custodians of their hard-earned capital. Founders choose to partner with us on their life’s work. It’s a big deal, and I can understand the desire for clarity in uncertain times.

My answer? In the short term, I don’t know.

Public market investing is above my pay grade (thank goodness) and picking short-term market cycles is a fool’s game. In venture capital, we’re interested in the shape of the world 10-plus years from now. During that time, we’ll see several market cycles and leadership changes.

But as VCs with a front-row seat, we’ll also see founders morph their product and move into adjacent markets as they adjust to customer feedback. We’ll experience the thrill and terror, of hyper-growth and the angst when growth stalls and progress takes longer than expected. Inexperienced founders will blossom into world-class leaders and others will find that management is not for them. Company cultures will evolve to become talent magnets.

So, what has happened? Profitable companies, like WiseTech, Altium and TechnologyOne, are holding up better. They’ve outperformed the broader tech market, declining by (only) 20-30 per cent of their post-Covid highs.

It’s a similar story in the US – the FAANG stocks only declined by 10-15 per cent. But Covid beneficiaries like Zoom and Peloton have been hit hard, tumbling 80-90 per cent and e-commerce businesses like Kogan, Temple & Webster, Chewy and Etsy have also dropped 60-80 per cent.

It’s natural to look at history for reference points or leanings. What can we glean from the rhythm or rhyme of history?

Some pundits are comparing today’s market decline with the boom and bust of 2000. Back then, I was running my first start-up – they were crazy times, but today’s world feels very different.

In 1998, we raised $10m at a $200m-plus valuation for an early-stage company, which is nuts even by today’s standard. We had revenue and profits, but it wasn’t uncommon for start-ups to be valued using an enterprise value (EV) to unique visitor (UV) multiple.

The fundamentals of many internet businesses were poor as unit economics was not well understood, and a lot of revenue was recycled by start-ups selling advertising to each other.

Exuberance reached its peak when dozens of dotcom companies bought Superbowl ads for millions of dollars per 30-second slot. Shortly after, in April 2000, the market dropped, eventually losing 78 per cent from peak to trough.

A few successful start-ups emerged, like Amazon, PayPal and, but many failed. Some venture capital firms were unable to raise new funds and closed. It took six long years for the amount of venture capital to pass 2000 levels, while it took 15 years for the Nasdaq index to return to 1999 levels.

By contrast, today’s start-ups are integral to the real economy and deliver genuine value to their customers.

Successful start-ups have achieved product-market fit and are core to their customer’s operations. They are companies like Go1, Eucalyptus and Regrow, which are reshaping the important sectors of education, health and agriculture respectively

Valuations in the private market increased by 50 to 200 per cent over a two-year period (for seed and growth rounds respectively) as new capital flooded into the market from hedge funds, private equity and sovereign wealth funds. Later-stage valuations drifted from their fundamentals.

Some public market adjustments are beginning to flow through the private markets, particularly for late-stage companies that haven’t nailed product-market fit or unit economics. But unlike in 1999, most companies understand their cash flow needs and have patient and supportive investors. Meanwhile, category leaders command (and deserve) a valuation premium.

The global financial crisis is an interesting reference point on the capital side. In 2008, many great start-ups, including Atlassian, Campaign Monitor, Envato and Github, were bootstrapped. Over half of my previous VC fund portfolio were high growth and profitable. The venture capital sector was tiny by today’s standards – we were one of a handful of Australian venture capital firms and our fund was 1/20th of today’s size.

When the shock to the capital markets reverberated through venture capital, there was not enough capital to support companies. Great companies thrived, but good ones that needed to raise faced valuation pressure due to the lack of capital. The dreaded down round was not uncommon, and some companies didn’t make it through.

Today, we have a thriving venture capital industry with more than 70 funds and over $4bn in dry powder ready to back Australia’s brightest entrepreneurs. There are a myriad of funding options for today’s founders: sophisticated angel investors, seed funds, growth funds, crypto funds, venture debt, revenue finance and more.

When we look back with nostalgia in 10 years on this market cycle, what could the story be?

I think it will be about the generational companies forming today in living rooms that will be household names. There will be hundreds of unicorns (up from 37 today) and a handful of $100bn tech companies (there are six decacorns today) and tech companies will dominate the top 10 public market list.

Crypto will have delivered some of the profound changes it promises, leaving the memes by the wayside. We’ll have made progress on some of the world’s most pressing problems like climate change, equality, education and health. Entire new industries will emerge. Job titles that don’t exist today will be some of the most sought after and many people will have re-skilled into tech.

These overnight successes take 10-plus years. If we can align patient, long-term capital with big ideas, talented entrepreneurs and technology, the future is bright.

This article first appeared in The Australian

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