Thu. Jan 20th, 2022

Some of the pandemic’s most high-flying stocks are struggling into the new year, and it’s bad news for tech companies of all sizes.

BestFitnessBands noted yesterday that software stocks had a pretty bad start to the year. That, it turned out, was just the beginning of the damage. Today’s trading took another bite out of the main technology sector.

Check out the following five-day chart of the WisdomTree Cloud Computing ETF, which tracks the Bessemer Cloud Index, long a key barometer of the performance of modern software stocks:

Image Credits: YCharts

According to YCharts data, the index closed at 46.30, or about 29%, moving from its recent all-time highs. The turnaround in the value of software stocks is quite wild. Today alone, the index lost 5.91%.

For a sense of scale, a 10% drop from treble is considered a correction. A 20% drop is a technical bear market. And a 30% drop? I think that’s called a shit storm.

Public Anxiety vs. Private Exuberance

The decoupling we discussed yesterday of private markets remaining incredibly bullish as public markets colder in some of the hottest startup categories is underlined by today’s trading.

But it’s worth noting that there are quite a few dynamics to the current pace of startup investment, suggesting that the stock market’s decision to revalue software stocks may take some time to trickle down to the startup level. What do we mean? Those venture capital funds are already attracted at certain dollar amounts and investment schemes. This essentially allows for a lot of big, expensive boot rounds to get done, even as their future exit window gets tighter; it will be harder to get a way out if the public markets continue to change their mind about the value of software revenue.

In more concrete terms, for example, startups generating a Series A today that values ​​them for future earnings pose a challenge where they must continue to increase at high revenue multiples as they grow. This gets a harder narrow to shoot as they scale through later rounds. The closer those startups get to the IPO scale, the more public markets will affect their ability to price their stocks. Falling public prices and fat private valuations will get confused at some point. And there are a lot of unicorns out there that won’t fare as well on the exit front if the stock continues to fall as they are.

Not a good start to 2022 for your local venture capitalist’s short-term liquidity opportunities, it seems.

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