‘We will see spectacular failures’: CEOs and investors on what the end of cheap money means for tech
Guillaume Pousaz, CEO and founder of payment platform Checkout.com, speaking onstage at the 2022 Web Summit tech conference.
Horacio Villalobos | Getty Images
LISBON, Portugal — Once high-flying tech unicorns are now having their wings clipped as the era of easy money comes to an end.
That was the message from the Web Summit tech conference in Lisbon, Portugal, earlier this month. Startup founders and investors took to the stage to warn fellow entrepreneurs that it was time to rein in costs and focus on fundamentals.
“What’s for sure is that the landscape of fundraising has changed,” Guillaume Pousaz, CEO of London-based payments software company Checkout.com, said in a panel moderated by CNBC.
Last year, a small team could share a PDF deck with investors and receive $6 million in seed funding “instantly, ” according to Pousaz — a clear sign of excess in venture dealmaking.
Checkout.com itself saw its valuation zoom nearly threefold to $40 billion in January after a new equity round. The firm generated revenue of $252.7 million and a pre-tax loss of $38.3 million in 2020, according to a company filing.
Asked what his company’s valuation would be today, Pousaz said: “Valuation is something for investors who care about entry point and exit point.”
“The multiples last year are not the same multiples than this year,” he added. “We can look at the public markets, the valuations are mostly half what they were last year.”
“But I would almost tell you that I don’t care at all because I care about where my revenue is going and that’s what matters,” he added.
Rising cost of capital
Private tech company valuations are under immense pressure amid rising interest rates, high inflation and the prospect of a global economic downturn. The Fed and other central banks are raising rates and reversing pandemic-era monetary easing to stave off soaring inflation.
That’s led to a sharp pullback in high-growth tech stocks which has, in turn, impacted privately-held startups, which are raising money at reduced valuations in so-called “down rounds.” The likes of Stripe and Klarna have seen their valuations drop 28% and 85%, respectively, this year.
“What we’ve seen in the last few years was a cost of money that was 0,” Pousaz said. “That’s through history very rare. Now we have a cost of money that is high and going to keep going higher.”
Higher rates spell challenges for much of the market, but they represent a notable setback for tech firms that are losing money. Investors value companies based on the present value of future cash flow, and higher rates reduce the amount of that expected cash flow.
Pousaz said investors are yet to find a “floor” for determining how much the cost of capital will rise.
“I don’t think anyone knows where the floor is on the upper hand,” he said. “We need to reach the floor on the upper hand to then decide and start predicting what is the lower end, which is the long term residual cost of capital.”
“Most investors do valuations still to this day on DCF, discounted cash flow, and to do that you need to know what is the residual floor on the downside. Is it 2%, is it 4%? I wish I knew. I don’t.”
‘An entire industry got ahead of its skis’
A common topic of conversation at Web Summit was the relentless wave of layoffs hitting major tech companies. Payments firm Stripe laid off 14% of its employees, or about 1,100 people. A week later, Facebook owner Meta slashed 11,000 jobs. And Amazon is reportedly set to let go 10,000 workers this week.
“I think every investor is trying to push this to their portfolio companies,” Tamas Kadar, CEO of fraud prevention startup Seon, told CNBC. “What they usually say is, if a company is not really growing, it’s stagnating, then try to optimize profitability, increase gross margin ratios and just try to just lengthen the runway.”
Venture deal activity has been declining, according to Kadar. VCs have “hired so many people,” he said, but many of them are “out there just talking and not really investing as much as they did before.”
Not all companies will make it through the looming economic crisis — some will fail, according to Par-Jorgen Parson, partner at VC firm Northzone. “We will see spectacular failures” of some highly valued unicorn companies in the months ahead, he told CNBC.
The years 2020 and 2021 saw eye-watering sums slosh around equities as investors took advantage of ample liquidity in the market. Tech was a key beneficiary thanks to societal shifts brought about by Covid-19, like working from home and increased digital adoption.
As a result, apps promising grocery delivery in under 30 minutes and fintech services letting consumers buy items with no upfront costs and virtually anything to do with crypto attracted hundreds of millions of dollars at multibillion-dollar valuations.
In a time when monetary stimulus is unwinding, those business models have been tested.
“An entire industry got ahead of its skis,” Parson said in an interview. “It was very much driven by hedge fund behaviour, where funds saw a sector that is growing, got exposure to that sector, and then bet on a number of companies with the expectation they will be the market leaders.”
“They pushed up the valuation like crazy. And the reason why it was possible to do that was because there were no other places to go with the money at the time.”
Maëlle Gavet, CEO of startup accelerator program Techstars, agreed and said some later-stage companies were “not built to be sustainable at their current size.”
“A down round may not be always possible and, frankly, for some of them even a down round may not be a viable option for external investors,” she told CNBC.
“I do expect a certain number of late stage companies basically disappearing.”
The X logo appears on a phone, and the xAI logo is displayed on a laptop in Krakow, Poland, on April 1, 2025. (Photo by Klaudia Radecka/NurPhoto via Getty Images)
Nurphoto | Nurphoto | Getty Images
Elon Musk‘s xAI Holdings is in discussions with investors to raise about $20 billion, Bloomberg News reported Friday, citing people familiar with the matter.
The funding would value the company at over $120 billion, according to the report.
Musk was looking to assign “proper value” to xAI, sources told CNBC’s David Faber earlier this month. The remarks were made during a call with xAI investors, sources familiar with the matter told Faber. The Tesla CEO at that time didn’t explicitly mention any upcoming funding round, but the sources suggested xAI was preparing for a substantial capital raise in the near future.
The funding amount could be more than $20 billion as the exact figure had not been decided, the Bloomberg report added.
Artificial intelligence startup xAI didn’t immediately respond to a CNBC request for comment outside of U.S. business hours.
The AI firm last month acquired X in an all-stock deal that valued xAI at $80 billion and the social media platform at $33 billion.
“xAI and X’s futures are intertwined. Today, we officially take the step to combine the data, models, compute, distribution and talent,” Musk said on X, announcing the deal. “This combination will unlock immense potential by blending xAI’s advanced AI capability and expertise with X’s massive reach.”
Read the full Bloomberg story here.
— CNBC’s Samantha Subin contributed to this report.
Alphabet CEO Sundar Pichai during the Google I/O developers conference in Mountain View, California, on May 10, 2023.
David Paul Morris | Bloomberg | Getty Images
Alphabet‘s stock gained 3% Friday after signaling strong growth in its search and advertising businesses amid a competitive artificial intelligence environment and uncertain macro backdrop.
“GOOGL‘s pace of GenAI product roll-out is accelerating with multiple encouraging signals,” wrote Morgan Stanley‘s Brian Nowak. “Macro uncertainty still exists but we remain [overweight] given GOOGL’s still strong relative position and improving pace of GenAI enabled product roll-out.”
The search giant posted earnings of $2.81 per share on $90.23 billion in revenues. That topped the $89.12 billion in sales and $2.01 in EPS expected by LSEG analysts. Revenues grew 12% year-over-year and ahead of the 10% anticipated by Wall Street.
Net income rose 46% to $34.54 billion, or $2.81 per share. That’s up from $23.66 billion, or $1.89 per share, in the year-ago period. Alphabet said the figure included $8 billion in unrealized gains on its nonmarketable equity securities connected to its investment in a private company.
Adjusted earnings, excluding that gain, were $2.27 per share, according to LSEG, and topped analyst expectations.
Alphabet shares have pulled back about 16% this year as it battles volatility spurred by mounting trade war fears and worries that President Donald Trump‘s tariffs could crush the global economy. That would make it more difficult for Alphabet to potentially acquire infrastructure for data centers powering AI models as it faces off against competitors such as OpenAI and Anthropic to develop largely language models.
During Thursday’s call with investors, Alphabet suggested that it’s too soon to tally the total impact of tariffs. However, Google’s business chief Philipp Schindler said that ending the de minimis trade exemption in May, which created a loophole benefitting many Chinese e-commerce retailers, could create a “slight headwind” for the company’s ads business, specifically in the Asia-Pacific region. The loophole allows shipments under $800 to come into the U.S. duty-free.
Despite this backdrop, Alphabet showed steady growth in its advertising and search business, reporting $66.89 billion in revenues for its advertising unit. That reflected 8.5% growth from the year-ago period. The company reported $8.93 billion in advertising revenue for its YouTube business, shy of an $8.97 billion estimate from StreetAccount.
Alphabet’s “Search and other” unit rose 9.8% to $50.7 billion, up from $46.16 billion last year. The company said that its AI Overviews tool used in its Google search results page has accumulated 1.5 billion monthly users from a billion in October.
Bank of America analyst Justin Post said that Wall Street is underestimating the upside potential and “monetization ramp” from this tool and cloud demand fueled by AI.
“The strong 1Q search performance, along with constructive comments on Gemini [large language model] performance and [AI Overviews] adoption could help alleviate some investor concerns on AI competition,” Post wrote in a note.
WATCH: Gemini delivering well for Google, says Check Capital’s Chris Ballard
CNBC’s Jennifer Elias contributed to this report.
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