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Well Drying Up — As more and more companies brace for the impact of a potential hard landing and rapidly increasing cost of capital, it’s hard to believe that early funding and VC dollars for more or less low-readiness business ideas will continue at current levels.
Looking at you, Cannabis, Web3.0, DeFi, and other businesses that are on the bleeding edge of innovation. In a funding-constrained environment, the future of investment into these types of businesses is sus, fr fr.
However easy it has been to yolo our bananas into these budding businesses, it will be that much easier to watch their funding streams turned off.
Think about the SPAC market as well as the general IPO deal flow this calendar year compared to the 18 months leading up to the current market correction from all-time highs.
What once seemed like a daily occurrence is now like seeing a unicorn: a big, highly publicized IPO is not as common as it once was.
The macro environment affects the readiness of these businesses and their desire to put their shares into public markets.
These types of deals are influenced by the trends in the economy; a great economy means that investors will demand increased cash flows. At the same time, as interest rates change, so do discount rates and expected IRRs.
In an upward-trending economy, this is gravy. Growth is the name of the game when everyone is flush with cash, and the well is quite liquid.
During a pullback or even a recession, the opposite is true. Companies will tend to put off IPOs and seek other financing options to raise cash.
Their demands for cash are affected by growth pressures as well as other external factors. These factors tend to include market trends, volatility, production or profits, and of course, psychology and investor sentiment.
If you thought only software companies have fallen out of grace and you’re still invested in weed, magic internet money, or speculative internet names, it might be a good time to consider downside protection or a shakeup in your portfolio.
Not to say that these names aren’t the future, but it’s likely that you’re going to experience moves lower before you experience any of that booming growth that the Gary V’s of the world are promising for these types of businesses.
In any case, the effects of interest rates and macro headwinds on capital raising schema are worth considering. While it’s not something your typical Robinhood trader is thinking about, you can make it to at least the junior varsity level if you try and consider the way the wind is blowing and how it will affect valuations in the coming months.
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