‘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.”
An Electron rocket launches the Baby Come Back mission from New Zealand on July 17, 2023.
Rocket Lab
Rocket Lab stock soared 8% Monday, building on a strong run fueled by space innovation.
Shares of the space infrastructure company have nearly doubled over the last two months following a slew of successful launches and a deal with the European Union.
The stock is up 63% year to date after surging nearly sixfold in 2024.
Last month, Rocket Lab announced a partnership with the European Space Agency to launch satellites for constellation navigation before December.
Rocket Lab also announced the successful launch of its 66th, 67th and 68th Electron rockets in June. The company successfully deployed two rockets from the same site in 48 hours.
Rocket Lab competes with a growing list of companies in a maturing and increasingly competitive space industry with growing demand. Some of the main competitors in the sector include Elon Musk‘s SpaceX and Firefly Aerospace, which filed its prospectus to go public on Friday.
“For Electron, our little rocket, we’ve seen increased demand over the last couple of years and we’re not just launching single spacecraft — these are generally entire constellations for customers,” CEO Peter Beck told CNBC last month.
He said the company is producing a rocket every 15 days.
Beck, a New Zealand-native, founded the company in 2006. Since its debut on the Nasdaq in August 2021 through a merger with a special purpose acquisition company, the Long Beach, California-based company’s market value has swelled to more than $19 billion.
WATCH: Rocket Lab CEO Peter Beck: One thing I don’t worry about at night is demand
Technology
Anthropic, Google, OpenAI and xAI granted up to $200 million for AI work from Defense Department
A view of the Pentagon on December 13, 2024, in Washington, DC. Home to the US Defense Department, the Pentagon is one of the world’s largest office buildings.
Daniel Slim | Afp | Getty Images
The U.S. Department of Defense on Monday said it’s granting contract awards of up to $200 million for artificial intelligence development at Anthropic, Google, OpenAI and xAI.
The DoD’s Chief Digital and Artificial Intelligence Office said the awards will help the agency accelerate its adoption of “advanced AI capabilities to address critical national security challenges.” The companies will work to develop AI agents across several mission areas at the agency.
“The adoption of AI is transforming the Department’s ability to support our warfighters and maintain strategic advantage over our adversaries,” Doug Matty, the DoD’s chief digital and AI officer, said in a release.
Elon Musk’s xAI also announced Grok for Government on Monday, which is a suite of products that make the company’s models available to U.S. government customers. The products are available through the General Services Administration (GSA) schedule, which allows federal government departments, agencies, or offices to purchase them, according to a post on X.
OpenAI was previously awarded a year-long $200 million contract from the DoD in 2024, shortly after it said it would collaborate with defense technology startup Anduril to deploy advanced AI systems for “national security missions.”
In June, the company launched OpenAI for Government for U.S. federal, state, and local government workers.
WATCH: US needs an allied strategy for AI investment in military and defense: Palantir
Meta CEO Mark Zuckerberg appears at the Meta Connect event in Menlo Park, California, on Sept. 25, 2024.
David Paul Morris | Bloomberg | Getty Images
Meta CEO Mark Zuckerberg on Monday said he plans to invest “hundreds of billions of dollars” into artificial intelligence compute infrastructure, and that Meta plans to bring its first supercluster online next year.
A supercluster is a large, complex computing network that’s designed to train advanced AI models and handle their workloads.
“Meta Superintelligence Labs will have industry-leading levels of compute and by far the greatest compute per researcher,” Zuckerberg wrote in a Facebook post on Monday. “I’m looking forward to working with the top researchers to advance the frontier!”
Zuckerberg said Meta’s first supercluster is called Prometheus, and that the company is building several other multi-gigawatt clusters. One cluster, called Hyperion, will be able to scale up to five gigawatts over several years, he said.
Zuckerberg has been on a multibillion-dollar AI hiring spree in recent weeks, highlighted by a $14 billion investment in Scale AI. He announced a new organization in June called Meta Superintelligence Labs that’s made up of top AI researchers and engineers.
Zuckerberg had grown frustrated with Meta’s progress in AI, especially after the release of its Llama 4 AI models in April received a lukewarm response from developers. He is revamping Meta’s approach to better compete with rivals like OpenAI and Google.
“For our superintelligence effort, I’m focused on building the most elite and talent-dense team in the industry,” Zuckerberg wrote Monday.
WATCH: Meta announces several multi-gigawatt data centers, first planning to come online in 2026
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