After years of venture investments encouraged by low interest rates, the pool of cheap money has dried up, leading to numerous failed businesses. Among them are WeWork and Bird, which declared bankruptcy in 2023, and Hopin and Clubhouse, which were popular during the pandemic but have since become irrelevant. Jeff Richards, a partner at venture firm GGV, predicted that the year 2024 will mark the end of the companies funded in 2021 due to zero interest rate policy (ZIRP) and will usher in a new group of promising businesses. As he wrote in a post on X.
As the decade concluded, it was straightforward for an engineer to use a Bird scooter to get to a WeWork office housing a fresh crypto startup. Then Covid-19 arrived, bringing with it a requirement for tools to permit remote collaboration. There was a surge of money towards entertainment and education apps for people to utilize while quarantining, and, of course, crypto. Money was accessible and inexpensive with the Federal Reserve's near-zero interest rate policy since after the financial crunch of 2008, and Covid-19 economic aid further encouraged investors to take chances, investing in the next huge development. This year, however, it all changed. With the Fed rising rates to the highest in two decades and inflation continuing, consumers started pulling back and businesses focused on cutting costs. Investors pulled away from the peak levels of funding seen in 2021, causing cash-burning startups to struggle or shut down. For numerous corporations, there was no desirable option.WeWork and Bird declared bankruptcies, while Covid-related businesses such as Hopin and Clubhouse practically disappeared. Furthermore, crypto entrepreneur Sam Bankman-Fried, who was in charge of the unsuccessful crypto exchange FTX, was convicted of fraud and could face life in prison. Just last week, Trevor Milton, founder of automaker Nikola, was given four years in prison for fraud. His company had accumulated funds and its value had gone up to over $30 billion on the claim of delivering hydrogen-powered cars to the masses. Also in December, Hyperloop One, which had obtained hundreds of millions of dollars to create a system of transportation that could deliver passengers and cargo quickly in a low-pressure environment, met its end.There is likely more pain ahead in 2024, as money keeps on diminishing for unsustainable startups. However, venture capitalists like Jeff Richards of GGV Capital viewed a light at the end of the tunnel, knowing that the zero interest rate policy (ZIRP) era is now in the past and proficient companies are succeeding. Richards stated on X (formerly Twitter) on Dec. 25, “My Prediction: 2024 is the year we finally dismiss the '21 ZIRP 'unicorns' and start discussing a new set of outstanding companies. Never overvalued, well run, consistently good growth and great cultures. IPO class of '25 coming your way.” He finished with a smiling face and crossed fingers emojis.
Investors appear to be heavily enamored with the tech sector. After experiencing a 33% decrease in 2022, the Nasdaq Composite has hopped 44% as of Wednesday's close, putting it on track to register its strongest annual performance since the culmination of the dot-com bust in 2003. Chipmaker Nvidia has amplified its value by more than three times this year as cloud companies and AI startups have rushed to get their hands on the company's processors for the purpose of educating and running complex AI models. Meta, the parent company of Facebook, has enjoyed a surge of almost 200%, rebounding from a difficult 2022 due to cost-reduction measures and investments in AI.
The tech sector's 2021 dramas took place in areas where profits were never likely to come up. Looking back, it was foreseeable. In the period between 2004 and 2008, venture capital investments in the US used to hover around $30 billion on average, which is based on records from the National Venture Capital Association. As the Federal Reserve dropped interest rates to nearly zero, institutional investors were cut off from fixed-income returns, and technology caused a considerable economic growth and a steady bull equity market.
In search for yields, investors started moving towards higher-risk tech investments. Between 2015 and 2019, VCs injected an average of $111.2 billion in the US annually, which was an all-time high for the period. This craze reached a pinnacle in 2021, with VCs channelling a whopping $345 billion to tech startups – an amount surpassing the entire investment made in the years between 2004 and 2011.
WeWork's eventual filing for bankruptcy was a process that had been developing for some time. The business, which grants access to coworking spaces, had managed to attract a considerable amount of funds from SoftBank and had been valued at $47 billion. However, its attempt to go public in 2019 was met with criticism due to its half-yearly reported losses of $900 million and questions were raised about certain deals that CEO Adam Neumann was involved with. After Neumann quit in September 2019, WeWork went public via a special acquisition company in 2021. Nonetheless, the sluggish return-to-office trends and increasing interest rates caused a drop in WeWork's finances as well as its stock prices.
In August 2020, WeWork announced a "going concern" related to their viability in a securities filing. This eventually led to bankruptcy proceedings in November of the same year. CEO David Tolley unveiled a plan to reduce the company's expensive leases, which had accumulated in their heyday. Bird, a scooter company, faced a similar setback, culminating in bankruptcy protection in April of 2023 after having reached a maximum valuation of $2.5 billion and being delisted from the NYSE. During this time, other companies such as Zoom, Netflix, and Peloton were seeing a surge in their stock prices, and Hopin, a virtual event planning platform, increased to a $7.75 billion valuation in August 2021. Meanwhile, Clubhouse, a platform for virtual conversations with celebrities and influencers, was funded by Andreessen Horowitz at a $4 billion evaluation. However, as lockdowns eased, users stopped engaging with the platform and the company was forced to lay off half of its staff. Hopin was also unable to maintain its growth and was sold to RingCentral for up to $50 million.
FTX, a crypto exchange, had similar issues, with a lack of transparency around the way founder Sam Bankman-Fried used customer money. With Nikola, it was the innovative efforts of founder Trevor Milton which had impressed investors, but the SEC and Justice Department launch investigations into fraud allegations shortly after the company went public, ultimately resulting in Milton's imprisonment and the SEC settlement.
Hyperloop One, originally called Virgin Hyperloop, raised over $450 million since its inception in 2014, with investors including Sir Richard Branson's Virgin Group, Russia's sovereign wealth fund, and Khosla Ventures. Despite this, the company was unable to secure contracts beyond a test site in Las Vegas, and allegations of executive misconduct added to its struggles. Now, Bloomberg reports that Hyperloop One is selling off assets and laying off remaining staff members.
The capital markets have been challenging for technology companies outside of artificial intelligence, with hardly any tech companies going public during the past two years after record years in 2020 and 2021. The few tech IPOs that took place this year have seen little enthusiasm, with Instacart's stock plummeting more than 40% after an initial public offering of $42 a share. Meanwhile, SoftBank's public offering of chip designer Arm Holdings at a $60 billion valuation provided some much-needed liquidity for the Japanese company.
Many bankers and tech investors believe that the earliest opportunity for the IPO window to reopen in a significant way is in the second half of 2024, when companies will have had more than two years to adapt to a changed environment for tech businesses and may get a boost from expected Fed rate cuts.
Adam Neumann, who had been propped up by billions of dollars in SoftBank cash prior to his exit from WeWork, raised $350 million last year from Andreesen Horowitz to launch a company called Flow. Andreessen Horowitz's investment was driven by their understanding of Neumann's experience, with the venture capital firm writing in a blog post that "we love seeing repeat-founders build on past successes by growing from lessons learned."
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