You wouldn’t necessarily expect that a year turned upside down by a global pandemic would also be a record year for investments, but that’s exactly what happened in 2021. A combination of factors including ongoing impacts of COVID-19, the related shift to remote and cloud services, and the 613 global Special Purpose Acquisition Companies (SPACs) that went public in 2021 resulted in unprecedented venture investments.
As 2021 drew to a close, there seemed to be one question on the minds of investors: Would 2022 surpass these new records or would the new year bring a dramatic slow down?
With $143.9B raised in global venture funding in Q1 2022, the first quarter was able to ride the coattails of a massively successful Q4 2021.
However, with numerous international factors contributing to an already volatile market – rising interest rates in the United States, geopolitical violence and uncertainty in Ukraine, rising inflation and concerns of global recessions, and the impact of strict COVID-19 lockdowns in China on the global supply chain – this 2021 carryover success was short lived.
As a result, there have been significantly fewer public listings in 2022 so far, suggesting that late-stage companies, in particular, may be forced to seek additional funding.
Was 2021 a Bubble or Is This Simply a Recalibration?
Many well-known publications have been reminding investors that, in the long run, periods of recalibration are part of a healthy market, especially considering the historically astronomical growth in the world of startups.
While that may be true, we must also examine the complexities that 2021 brought about by using SPACs as a more streamlined alternative to the traditional IPO.
SPACs have been around for decades, but their popularity drastically increased in 2021 because they allow companies to go public quickly. This design, coupled with the 900+ global unicorns who were under investor pressure to exit, resulted in more than 600 SPAC listings in 2021.
Of the companies that used a SPAC to go public in 2021, only 11% are now trading above their offering price. This 2022 underperformance means that the majority of investors have been left with massive losses. Now, many are referring to this as the bursting of the SPAC bubble, and the domino effects are still being felt in the market.
As Jeffrey Bussgang, partner at Flybridge Capital Partners, told Quartz, “Valuing companies at 30-100x revenue was never sustainable. At some point, the market was going to correct, but no one wanted to be the firm that was left out while the music was still playing.”
So while we’re all well aware that it’s impossible for economic growth to continue upwards forever without eventually turning into a precarious bubble, that doesn’t make this market volatility any easier for investors to navigate.
How Is This Volatility Impacting Investor Behavior?
Michelle Kaiser, Director of Investor Relations at Equitybee, thinks that more attention should be paid to how these complex factors contribute to an unclear economic outlook, as well as the ripple effects of that uncertainty.
With this in mind, Kaiser says that, currently, investors are predominantly falling into one of two camps: those who are buying on the dip, and those who are keeping an eye on things from the sidelines. Regardless of which camp an investor is in, Kaiser says that this is the time for them to reevaluate their whole portfolio.
“For investors, this is the time to observe, ‘Am I overweight in public stocks, relative to where I want to be? Or in private equities? Am I underweight in certain areas?’” she said. “This is the time to maybe buy a little bit and rebalance, but I do not think this is the time to make big adjustments.”
Looking Ahead to the Future
As we all wait for the Q2 2022 reports, many are echoing Kaiser and suggesting that investors ‘remain cautious’ and avoid making any drastic changes to investing strategies.
According to Ben Pace, Partner and Chief Investment Officer at Cerity Partners, the Q2 data will help investors see “whether the economy is merely slowing from unsustainably high rates or beginning to recede.”
During this waiting period, Kaiser is one of many Equitybee team members working hand in hand with investors on a daily basis, and is therefore able to offer some insight into the role that cash flow is playing at this time.
“We’ve seen investors saying ‘Hey, I want to invest in this, but I can’t afford to sell anything right now because I’d be selling it at a loss.’ They could have cash if they needed – because they could sell their stocks – but it wouldn’t be at the most advantageous time,” she said.
“This may be more of a lesson to make sure that, yes, investors should always have cash on hand for 3-6 months of living, but they may also want to have extra cash on hand to buy during dips like this.”
The approach of rebalancing and limiting risk – while waiting for more data to become available – is backed by numerous other notable institutions, including Charles Schwab and Axios. For investors researching potential next steps while waiting for that critical Q2 data, Kaiser hopes they’ll look to Equitybee.
“In my opinion, if investors did want to participate in private companies, Equitybee is the place to be. I am still bullish on Equitybee because of the value that we offer. We are funding employee stock options at their cost, which is their strike price plus any potential taxes that they may have.
This may be at a significant discount to what common shares are currently valued,” Kaiser said.
“So even if the share value gets readjusted and takes a 20–30% cut, there may be enough of a buffer for the investor to realize a potential upside upon a liquidity event.”
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