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2022 Was The Calm Before The Storm For Tech Startups

A few words on the year ahead

For early-stage tech investors, 2022 was the year to talk about the correction in the public markets and ensure your portfolio companies had 18-24 months of runway. As we approach the end of that runway, the realities of over-funding and over-spending are setting in.

By: David Jegen

I lived the dot-com and 2008 corrections, and unfortunately 2023 is bound to be an incredibly challenging and unpleasant year for founders, tech employees, and investors.

Many private companies will be just fine. Indeed, one thing that separates the last decade from the dot-com era is the fundamentally high quality of today’s business models. The roots of today’s crisis owe more to excess capital and unconstrained spending.


We are going to see four scenarios return that were largely absent for the last 10 years.

I’ve seen examples of them all over the last 60 days.

1. The quiet wind down. Startups that cannot raise sufficient capital at any valuation are shutting down and sending heartfelt thank you emails to their customers. Sadly, these won’t always be “bad businesses,” but for a variety of reasons – team, lack of traction, out-of-favor sector, down-rounds that are simply too draconian — investors just will not invest more capital (despite all the “dry-powder”).

2. The strong(er) acquire the weak(er). Every well-capitalized and scaled startup ($50M+ revenue) is drafting a list of target acquisitions. Every poorly capitalized, but semi-scaled startup has a list of acquirers. While there will be a lot of talking, the targets will rarely get “fair value” because acquirers have so many choices and will view every acquisition opportunistically – if they can’t get a good asset at a great price, they will move on to the next.

Valuing businesses is itself a challenge, especially when everyone knows the last-round valuation was too high. Investors and founders will opt for simple heuristics like exchange ratios based on ARR or gross profit. In reality, there is not much value in building discounted cash flow models (DCFs), but the target will struggle to capture value if it’s growing two or three times faster than the acquirer. Exchange ratios do not, but if the target is lucky, it can get a higher multiple on their ARR or gross profit than on the acquirer’s, to reflect that growth differential. Unfortunately, in this environment that will rarely happen.

3. VCs play match makers. Investors will catalyze business combinations for good reasons – gaining scale while reducing competition – and for bad reasons — one problem portfolio company is better than two. Obviously, founders should be leery of the latter and evaluate the M&A on its merits.

4. Recaps return. Recaps are down-rounds with bombs attached. They target two problems – co-investors who won’t or can’t invest more capital, and management teams that will need more equity to be incentivized following the down-round. With pay-to-play and pull-through provisions, early investors will suffer major dilution and/or lose preferred stock rights if they do not invest more capital.

Recaps are appearing and they will be contagious. Investors who have been subject to them in one portfolio company will introduce them at another. And as investors invest more capital than they had reserved to protect their earlier investments, they will shift reserves from one company to another inducing the vicious cycle. Fortunately, founders of fundamentally good businesses can come out OK with post-round equity top-ups, but there will be a lot of collateral damage.


While these will be challenging times for many startups, being aware of these scenarios and approaching them proactively and with the right mindset will help founders and investors alike. Great businesses continue to founded, disruption will continue, and a lot of investor capital is available for the future.

I lived the dot-com and 2008 corrections, and unfortunately 2023 is bound to be an incredibly challenging and unpleasant year for founders, tech employees, and investors.