The first half of 2022 marked the worst stock market performance since 1970, with the Standard & Poor’s 500 Index losing 21 percent. For most local tech companies, the damage was even worse.
Cambridge business software company HubSpot saw its stock drop 54 percent, online betting giant DraftKings lost 58 percent, and shares of first responder tech company Everbridge dropped 59 percent. Two companies that went public last fall with much acclaim, payments tech company Toast and synthetic biology pioneer Ginkgo Bioworks, also got hit hard in 2022. Toast lost 63 percent, and Ginkgo 71 percent. The biggest loser on the local scene was online furniture seller Wayfair, with a stunning 77 percent loss.
The reasons for the steep drop start with the Federal Reserve raising interest rates, which makes the future profits of 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 curbed optimism about the tech sector.
Some local companies also suffered from more specific problems. Wayfair has seen its customer base shrink as the easing of pandemic restrictions led people to shop more in physical stores and spend 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 a single bright spot: Portland, Maine-based payments company WEX. Many business customers use WEX’s technology to pay for gas, so the rising price of fuel aided its revenue. Its stock price gained 11 percent.
The latest crash in tech stocks has some similarities to what happened in the dot-com crash from 2000 to 2002 and the “Great Recession” of 2008-2009, Larry Cheng, founding partner of Volition Capital in Boston, reminded me. Cheng studied those past two episodes and compared them to the current situation.
“This type of market decline is something we have absolutely seen before,” he says. All three episodes were preceded by significant amounts of money pouring into the tech sector, what Cheng calls “hot money,” that drove valuations to “crazy multiples.”
But there is one major difference. In the prior two market crashes, the Fed was able to lower interest rates to reassure investors. In this case, because of rampant inflation, the Fed is raising interest rates.
“So now we’re in a different scenario where the stock market has massively declined, but oh, by the way, you have the bond market cratering... and you have inflation through the roof,” Cheng says. “The long and short of it is I don’t think we’re done in terms of the correction. I think there’s more to come.”
For private tech companies, where Cheng’s firm invests, the economy is also challenging and there is less available capital to keep unprofitable companies afloat. “You’re going to see more high-profile companies probably not survive in the coming months,” he predicts.
Volition is still funding some startups, even in the current environment, however. It led a $13 million deal for California telehealth provider Sensible Care last week.
“We’re looking for core services on the consumer side and indispensable services on the enterprise side,” Cheng says.