Text by Alon Sochaczewski, Founder and CEO of Pipeline Capital Tech.
It’s time for Techs. The investment market does not forgive, a crisis is on the way, bad mood contaminates everything that does not have austerity and, evidently, the companies of the future, the tech ones, did not escape.
The market questions who does not grow more like Netflix. Where is your profit and your growth? It does not have? Cut.
Is Snap not going to make the expected profit? Cut.
And for the benefit of the doubt, cut all Tech asset values, after all they have the same behavior.
But then what will happen?
It’s a Cycle.
Ycombinator released a hit post on Twitter, warning its investors that the moment is “parable down” and that they hold their cash or raise money now, because it will be more difficult to get money at a good price. I emphasize here that he did not say that he will not have money.
But things will return to a new normal.
This will only happen when the global economy returns to growth with favorable conditions with reduced inflation, interest rates, GDP growth and a more peaceful world, without a pandemic, lockdowns, relevant wars, etc. Will we have this condition again soon?
We do not know exactly how long this stabilization will take.
It may take many years just as we are heading towards the 3rd. post-pandemic year and with a locked-down China – in a new lockdown disrupting many production chains.
Okay, but I have a Tech company, so I got screwed?
It will depend on your project.
If you have a company that grows generating results, everything is fine – the famous bootstrap. But… if you burn cash to grow or intend to accelerate your business by sacrificing margin and cash, you need to be careful. Here are some effects and conditions right now and for the foreseeable future:
- If you want to capture, surely asset values are lower. You can raise money, but by selling more equity.
- Your financial and cash modeling will have to be very sharp. But very much.
- If you choose debt, you’ll pay a much higher rate, but without sacrificing low share prices. It can be a great option for those with management maturity and generous future margins.
Who has a mature and sustainable company, currently has a small price adjustment – the increase in interest rates impacts on the reduction of valuation (discounted cash flow). But if it’s a company with a lot of value, liquidity remains unshakable.
But I issue a warning in Bold: “You have to understand that we have different liquidity markets”.
We have companies with different sizes and moments. One thing is the questioned value of the giant Netflix, a mature company. The other, from the Brazilian unicorn Único, for facial recognition. And finally, a smaller technology services company, which earns its R$ 20 million per year and has a moderate growth.
These are companies at different valuation times. You can’t put everything in the same bag.
OK, Alon, but will the M&A market be affected?
Do I have to insure the sale of my company?
M&A volume will not be affected
M&A is “the solution” with or without a crisis, for companies’ inorganic growth. What we will have is an increase in mergers, however, the volume of investment will remain high. We have a lot of Private and Venture Capital capitalized. It is a market that moves towards transformation and that, again, will not stop because of the crisis.
And will we Latinos be more affected?
I do not think so.
Latin America is becoming a very attractive region globally. From a digital point of view, it has been growing a lot and with many talented companies. Entrepreneurship has increased with a generation of new entrepreneurs born outside the academic axis and hands-on.
We are a region that brings new global players such as Globant, VTEX, MercadoLibre, among many others. Many companies are being born, future giants here in the region.
Many global Private Equities are increasing investments in the region. Advent announced this week a new fund, with the intention of investing USD 5 billion in the region. General Atlantic bought 10% of Locaweb. They are clear signs of the value of the region. Last year we mapped the investment market and the number of local investment houses that were born in the last 3 years is impressive.
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