This article was originally featured on USA Today.
After years of seemingly unending growth, the tech sector and its massive valuations have finally come back down to earth, experts told USA TODAY this week.
Even the biggest gainers like Facebook, Amazon, Alphabet, Netflix and Google have experienced painful quarters of retrenchments and share price drops, as the entire market has readjusted to a "new normal" post-pandemic.
But the question of whether the tech sector was actually in a bubble over the last decade was a hotly debated topic throughout one of history's longest bull markets.
Everyone from Apple co-founder Steve Wozniak to Tesla owner Elon Musk to policymakers, including former Treasury Secretary Larry Summers, weighed in with opinions about whether technology itself had perhaps graduated into a recession-proof investment after racking up years of gains.
The smart money says yes, probably.
A spate of layoffs and disappointing second- and third-quarter results have found investors reevaluating that mantra.
Catherine Dahl is the co-founder and CEO of Beanworks by Quadient, which uses artificial intelligence to help companies with accounting. She said she expects more layoffs to come at big tech firms, particularly if a recession deepens.
"Even the companies that appear to have great cash reserves have laid off large numbers of staff, Netflix being one," she said. "The biggest players are likely the safest as they are profitable, like Amazon, Apple, Google and Microsoft for example."
Market watchers now have a less sanguine view of tech's top companies overall. For many, the sheen has worn off of many previous "sure bet" tech firms, even ones in the unicorn section, which is for startups that are valued at $1 billion or more.
"Certainly not right now," Sean Harper, co-founder and CEO of insurance technology company Kin Insurance, told USA TODAY.
"Valuations have come down a lot even while the majority of tech companies have not seen a big impact to their revenue or growth, so if anything I think we are in an irrationally pessimistic market for tech investment, assuming that we don’t see big decreases in revenue and revenue growth as the Fed further tightens," Harper said.
Thomas Rozycki is a managing director at Prosek Partners, with a background in financial services and consulting.
"We were in a bubble," Rozycki said. "With many of the shares of the companies we cover down more than 80% the past 12 months, we do not believe we are in a bubble anymore."
The average investor or their fund manager has been paying particularly close attention to parts of the sector that appear to be flailing. Experts said that right now, the market is looking for the most fortified companies, which can hold on through periods of weak growth and disappointing earnings.
Kraig Swensrud was the former CMO at Salesforce and is currently the CEO at Qualified, which is the pipeline cloud for Salesforce.
"The tech industry has only been in growth mode for the past decade, and we have an overwhelming number of young employees in our industry," he told USA TODAY. "Folks under the age of 35 were generally not in the working world the last time we experienced a recession. So many employees are surprised that there could possibly be layoffs and a downturn in tech."
He said that the way investors are now viewing tech is a complete reset from the last decade or so. Proof of concept and a solid balance sheet and business plan are becoming a lot more attractive than tech perks or talent rosters used to be.
"Over the last 12 years, we’ve been on a tremendous bull market run with low-interest rates, euphoric conditions, and never-ending flows of venture capital," Swensrud told USA TODAY.
Now companies are being forced to show investors how they plan to make money and survive over the long haul. That's a major change from when companies like biotech tech startup Theranos, without even a working product, could still rake in billions of dollars in venture capital.
"Over the last decade, a ‘growth at all costs’ mindset was prevalent in the industry," Swensrud said. "Now that we’ve experienced a reset in the market, the mindset has quickly shifted to cash flow, margins and efficiency."
Still, even with a major resetting of the market, there were contrarians who told USA TODAY there is plenty of money out there for companies that can show they have an idea or concept that works and will sell.
"Funds are still announcing huge raises. Battery recently announced $3.8 billion in new capital, so there is a lot of cash that needs to be deployed," Todd Olson, CEO and co-founder of product experience platform Pendo, said.
Those massive infusions of cash are coming with some new caveats, however.
"But investors are more cautious, and they are looking at numbers like customer retention, churn, and burn rate, alongside growth," he said. "And while funds are generally still available, leaders need to reset their expectations around valuation multiples as those have adjusted down since last year’s record highs."
Many of the companies that were minted during the 2008 recession and earlier dot-com bubble, like Salesforce and Google, are now having to adapt to survive. Some have even found themselves outrun by competitors that have found a way to stay nimble and bet on new products and ideas that have kept them innovating and in business.
"But many of the companies that have come to represent the technology industry today did not exist in the dot-com era or even materially exist during the Great Recession of 2008," Svensrund said. "Companies like Twitter, Dropbox, Asana, Okta and Twilio were all just getting started during the Great Recession. Many giants of our industry today, such as Zoom, Snowflake, and HashiCorp were all founded after the Great Recession."
For many investors, seeing the tech market lose value and disappoint some investors is just a natural part of the lifecycle of economics. What goes up must surely come down, they argue, and no company – not even one helmed by Mark Zuckerberg or Sergey Brin – can stay on top forever, they say.
"Tech stocks naturally see booms and busts as part of a regular market cycle. Similarly, bitcoin’s current price dip is in keeping with its historical price patterns," Matt Senter, CTO and co-founder of bitcoin rewards app Lolli, told USA TODAY.
"If anything, tech and bitcoin’s price patterns have stabilized at sustainable levels that are factoring in the transitional state of the market," he said. "Both bitcoin and tech prices are now reflecting cautious optimism toward a recovery from pre-recessionary conditions, taking into account slowing inflation and tentative economic growth."
Tobi Knaup is the co-founder and CEO of D2iQ, an enterprise cloud platform. Knaup said that tech is now showing signs of deflation, as business leaders look at new ways to boost business.
"Business decision-makers need to determine which initiatives are 'must haves' based on their direct impact on the business, and which ones are 'nice to have' because they are experimental, or still in the proof-of-value phase," Knaup told USA TODAY.
"CEOs now understand that investments in tech such as cloud-native platforms and AI will unlock new revenue streams, reduce operating costs and increase business agility," he said. "Many are using this time as an opportunity to become more competitive by investing in the right technology initiatives."
Maybe.
Dahl said that investors have spoken loudly and clearly about how little confidence they have in tech right now.
That includes a drop of 19% quarter-over-quarter in venture capital investing, a plummeting NASDAQ which has tumbled 27% since January, and continued bad news about cash reserves and paused projects from giants like Facebook and Netflix.
Dahl said, with that in mind, investors have some opportunities now to pick up some smart buys at a discount if they know where to look.
"Market downturns often go hand in hand with opportunities to invest, and right now stock prices are lower than they've been in months," she said. "Multiples in 2021 were very high, historical in fact, but they have come down. Although it will take some years for the multiplies to recover, this is the best time to look to invest in solid growth companies."
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About Qualified
Qualified is the pipeline generation platform for revenue teams that use Salesforce. Headquartered in San Francisco, Qualified is ranked #1 on the Salesforce AppExchange and is led by former Salesforce CMO Kraig Swensrud and former Salesforce product SVP Sean Whiteley. Qualified is funded by Sapphire Ventures, Tiger Global, Norwest Venture Partners, Redpoint Ventures, and Salesforce Ventures. To learn more, visit qualified.com.
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