The first half of 2022 marked the worst stock market performance since 1970, with the Standard & Poor’s 500 index losing 21%. For most local tech companies, the damage was even worse.
Cambridge enterprise software company HubSpot saw its shares fall 54%, online betting giant DraftKings lost 58% and shares of first responder technology company Everbridge fell 59%. Two companies that went public last fall with great success, payment technology company Toast and synthetic biology pioneer Ginkgo Bioworks, were also hit hard in 2022. Toast lost 63% and Ginkgo 71%. The biggest loser on the local scene was online furniture retailer Wayfair, with a staggering 77% loss.
The reasons for the sharp drop start with the Federal Reserve raising interest rates, which makes future profits for tech companies less valuable and makes it more expensive for investors to borrow money. The weakening economy, beset by high inflation and COVID shortages, has also dampened optimism about the tech sector.
Some local businesses also suffered from more specific problems. Wayfair has seen its customer base decline as the easing of pandemic restrictions has led to people shopping more at physical stores and spending less on home furnishings. Everbridge lost its chief executive at the end of 2021 and was attacked by activist investor Ancora Holdings for “ineffective leadership”.
There was one silver lining: Portland, Maine-based payments company WEX. Many commercial customers use WEX’s technology to pay for gas, so rising fuel prices have helped its revenue. Its stock price gained 11%.
The latest tech stock crash bears some similarities to what happened during the dot-com crash of 2000-2002 and the “Great Recession” of 2008-2009, Volition founding partner Larry Cheng reminded me. Capital in Boston. Cheng studied these last two episodes and compared them to the current situation.
“This type of market decline is something we’ve absolutely seen before,” he says. All three episodes were preceded by large sums of money pouring into the tech sector, what Cheng calls “hot money,” which drove valuations to “insane multiples.”
But there is a major difference. During the two previous stock market crashes, the Fed was able to lower interest rates to reassure investors. In this case, due to runaway inflation, the Fed raises interest rates.
“So now we’re in a different scenario where the stock market is down massively, but oh, by the way, you’ve got the bond market in a crater…and you’ve got inflation through the roof,” Cheng says. “In summary, I don’t think we’re done in terms of the fix. I think there’s more to come.
For private tech companies, where Cheng’s company invests, the economy is also tough and there is less capital available to keep unprofitable companies afloat. “You’re going to see that more and more leading companies are unlikely to survive in the coming months,” he predicts.
However, Volition is still funding some startups, even in the current environment. He drove a $13 million contract for California telehealth provider Sensible Care last week.
“We are looking for basic services on the consumer side and must-have services on the business side,” Cheng said.