Don’t let today’s software rally improve your mood

After a rough year in the public markets, you might take today’s brilliant trading as good news. Any positive price movement is a win, right? Kinda.

The tech-heavy Nasdaq Composite index rose 3.4% today, while other major U.S. indices jumped smaller amounts in a hall-of-fame start to the trading week. (That the markets are turning up for Disrupt is rather kind, I must admit.) Even more important to the tech industry, however, is sector-specific news.


Good news? Sure, but only if you are into squashy cats.

Let me explain. When the value of a particular commodity or security falls sharply, it often follows up its declines by bouncing back a little. If the underlying forces that drove the security negative remain in place, such rebounds often prove short-lived, and not indicative of the actual “bottom” of any particular trading range. This is often called, somewhat inartfully, a “dead cat bounce,” or more specifically, the sort of modest rebound that a cat’s corpse might manage if it hit concrete after falling from a high window.

Don’t let today’s software rally improve your mood by Alex Wilhelm originally published on TechCrunch

There’s still good news out there for software startups

The 2022 startup market might feel like a slowly unfolding train wreck, but there’s good news to be found — provided you are willing to take a longer-term perspective.

Sure, startup layoffs are spiking, venture capital is slowing, and the stock market is a hot mess. Underneath each drumbeat of negativity, however, there’s more positivity than you might expect. And, extracting one more nugget from the recent Battery Venture quarterly cloud update, the doomsayers are ignoring history.

So this fine weekend, let’s find the sunshine amid the clouds. Get it? Clouds. OK, no more SaaS dad jokes. To work:

Founders, here’s the good software news

The good news is a variation of the bad news and is often positive thanks to historical comparisons. Sure, this is good news of a sort, but it’s welcome all the same:

  • The Bad News: Startup layoffs are spiking.
  • The Good News: Far less than in early 2020.

As Homebrew’s Hunter Walk noted recently on his personal blog, startup layoffs hit a local maximum last month, reaching 16,000 and change, per the Layoffs.FYI tracker. Given that the same data service recorded effectively zero startup layoffs during the Q3-Q4 venture boom, the figure is bad. But! It’s also far less bad than the damage startups endured in early 2020.

For example, startup layoffs reached nearly 10,000 in March 2020. And then for months, they stayed hot, with more than 25,000 recorded in both April and May of the same year. Just 70 individual startup layoff events were noted by Layoffs.FYI in May 2022, far fewer than the more than 100 per month recorded from March through May 2020.

Things are worse than they were in late 2021 from a startup staffing cut perspective, but we’re hardly setting records here, even looking just at recent data.

  • The Bad News: Venture capital is slowing.
  • The Good News: From historically record levels.

The SaaS sell-off is steepening

By now you may be tired of stories detailing the bad news in the market. Too bad! More are coming.

If the deluge of negative headlines feels like a pile-on, recall that in 2020 and 2021, TechCrunch obsessively covered the technology, startup and venture capital markets’ various excesses; to not cover the party’s comedown would be a gross oversight.

For a broader think on the slowdown, and what falling prices for stocks and crypto assets mean for startups and unicorns more generally, head here. From here on out, we’re only talking SaaS.

What’s the matter with software companies?

Software companies, viewed through the public subset of the larger cohort, had a simply amazing run after COVID settled onto the global stage. Public software companies were beneficiaries of two things: First, it quickly became clear that software would keep selling, even in a downturn. And, second, there was little to no growth in other places to invest in, so money piled into tech concerns.

This was the pandemic trade, in effect. And as it became a defining period for the value of tech stocks, its unraveling is having a similar effect, in reverse.

That reversal is not done. Not yet. Despite a massive sell-off since November highs, tech stocks are proving today that there are new depths to plumb. For example:

Image Credits: Yahoo Finance

This particular ETF tracks the Bessemer Cloud Index, a list of public software companies that mostly deliver their business through the cloud. The basket of stocks peaked at $65.51 per share, meaning that as I write to you, it’s off 54% and change.

So is there a bottom for tech stocks, or what

Here at TechCrunch we keep tabs on the stock market.1 And the stock market has turned into an awful vomit-machine lately, puking up last year’s gains onto its own shirt, and, by extension, the larger technology market and startup-land.

Not that this should be news per se; if you have been tracking the markets at all — or reading TechCrunch, I might add — you are aware of the general direction of things. That’s good. But things have kept getting worse to the point that it’s time to sit back, and wonder where the hell the bottom is for tech stocks.

Long-term bulls of tech companies, and especially the more modern SaaS and on-demand companies that have gone public in recent years, love to argue that over a long-enough time horizon nothing happening today matters. And there is some truth to that. But that’s a perspective that the already wealthy can take; for the rest of the world, the market’s shorter-term movements do matter.

There are obvious connections between the stock market and startups. A few for flavor: As stocks falls, LPs have less money, and may be less interested in putting capital into VC funds; falling stock prices makes it harder to price acquisitions attractively; a depressed stock market can close the IPO window, limiting exits. And falling share prices can limit the prices at which startups raise, as their comps are in free fall. It’s a long list.

Not that your friendly, local seed-stage startup should be waking up at 3 am to check futures data for U.S. markets. Not at all. But tracking the public comps for your sector here and there? Yeah, that’s smart.

So let’s do just that. Some damage, starting from a high-level, and then getting a little bit more precise (52-week-high data from Yahoo Finance, change calculated to closing price today, rounded to nearest point):

  • Nasdaq Composite change from 52-week high: -21%
  • Innovation stocks change from 52-week high ($ARKK): -56%
  • Cloud stocks change from 52-week high ($WCLD): -45%
  • Fintech stocks change from 52-week high ($FINX): -47%

Holy hell, that’s some damage. Today alone the Nasdaq lost 3.6%, and cloud stocks fell 4.4%. It’s a mess out there.

What’s going on? A combination of rising interest rates, the end of the pandemic trade more generally, decelerating growth rates at some public tech companies and a general reversion toward what we could call historical pricing norms.

That last bit is terrifying, because if it turns out that the long-term average revenue multiple for, say, software companies is 8x revenues and not 15x or 25x or more, a lot of startups are going to suffer when they have to translate a fundraise from the market peak to a later fundraise at more parsimonious levels.

More as the market evolves, but maybe some worry is warranted as we still don’t know where the bottom really is for tech stocks.

  1. OK, it’s mostly just me, but who cares.

Tech stocks manage modest rally after lackluster US jobs report

Update: Tech stocks have given up all gains since this post went up, with both the Nasdaq and the basket of software stocks we track in the red. From a slightly later perspective, concern about near full-employment and resulting rising interest rates appears to have won the in-market sentiment battle.

The relationship between economic news and the value of technology stocks has been a fun puzzle in recent months.

You might think that strong jobs reports, for example, would lead to general economic optimism and, therefore, upward movements for technology stocks. And you might also expect that poor economic data would lead to general economic pessimism, and therefore downward movement for technology stocks. You know, because tech is a big part of the present-day economy.

Ha, no. Well, partially yes, but also no.

Heading into today’s jobs report, there was a specter hanging over the markets. Namely, the U.S. Federal Reserve, which will begin to tighten monetary policy this year, perhaps through the end of its bond-buying program, cutting its balance sheet and raising rates. The result of the Fed tightening rates is that bonds and other lower-risk assets would become more attractive. At the same time, rising rates are expected to make expensive tech stocks less attractive given risk-adjusted return evolution.

Given that dynamic, you might expect that a strong jobs report today would mean that tech stocks would go down, and a jobs report miss would mean that tech stocks would go up. That almost happened. Today’s December jobs data missed (199,000 net new jobs reported, about half of expectations) and tech stocks initially sold off. But then when markets opened, they ripped higher, with the Nasdaq up 0.34% — while the Dow Jones Industrial Average is down a fraction — and software stocks are up around 0.8%.

Why the drop and then bounce in tech stock value?

There’s concern that we’ve effectively reached full employment. Which could mean that the lackluster December jobs number was not driven entirely by a lack of employer demand, but also in part due to a lack of worker supply. (The fact that we remain in a global pandemic plays into this dynamic, of course

We find ourselves, then, in the weird situation when a poor jobs report could indicate that the economy is stronger (closer to full employment) than anticipated, implying that wages and prices will continue to rise, inducing the Fed to raise rates. Which, as noted above, would mean that higher-risk assets would sell off and less risky assets would become more attractive. And yet tech stocks are a touch higher because, well, it appears that the markets are deciding that the poor-ish report will net out positive for tech shares, which have sold off sharply in recent weeks. Or that the lackluster jobs report will prove less Fed-provoking than a strong jobs report, in essence.

So, tech stocks are higher today and everyone who works in the industry gets a little wealth bump.

Software stocks get punched in the face (again)

Some of the most high-flying stocks of the pandemic are struggling in the new year and it’s bad news for tech companies of all sizes.

TechCrunch noted yesterday that software stocks were having a pretty poor start to the year. That was, it turned out, only the beginning of the damage. Today’s trading took yet another bite out of the key tech sector.

Observe the following five-day chart of the WisdomTree Cloud Computing ETF, which tracks the Bessemer Cloud Index, long a key barometer of the performance of modern software shares:

Image Credits: YCharts

Per YCharts data, the index closed at 46.30, or some 29% and change from its recent all-time highs. The turnaround in the value of software stocks is pretty wild. Today alone the index shed 5.91%.

For a sense of scale, a 10% decline from highs is considered a correction. A 20% decline is a technical bear market. And a 30% decline? I think that’s called a shitstorm.

Public fear versus private ebullience

The disconnect that we discussed yesterday of the private markets staying incredibly bullish while public markets run colder on some of the hottest startup categories is underscored by today’s trading.

But it’s worth noting that there is quite a lot of momentum to today’s pace of startup investment, hinting that the stock market’s decision to revalue software stocks may take some time to trickle down to the startup level. What do we mean? That venture capital funds have already been raised at particular dollar amounts and investment schedules. This in essence sets up a lot of big, high-priced startup rounds to get done even as their future exit window tightens; it’s going to be harder to land an up exit if the public markets keep their minds changed regarding the value of software revenue.

In more on-the-ground terms, startups that today raise, say, a Series A that values them on future revenues are setting up a challenge in which they have to keep raising at high revenue multiples as they grow. This will become a more difficult narrow to shoot as they scale through later rounds. The closer those startups get to IPO scale, the more that public markets will impact their ability to price their shares. Falling public prices and fat private valuations will get into a tangle at some point. And there are a lot of unicorns out there that won’t fare super well on the exit front if stocks keep falling as they are.

Not a great start for 2022 for your local venture capitalist’s near-term liquidity chances, it appears.

Tech stocks are getting hammered (again)

I have a run of internal meetings starting in 15 minutes, so we have to be quick, but tech stocks are taking body blows yet again today. A selloff earlier in the week had us taking note. Today cements our raised eyebrows.

And when we say tech shares are under attack, we are not only pointing out that DocuSign has lost more than 40% of its worth thus far today, or that the Nasdaq Composite is off 2.5%. SaaS and cloud stocks are off 6.5% today after declines earlier in the week. They are now in a technical bear market. That matters!

Yes, things could snap right back. But they may not. The first inning of a correction, or just another blip?

Context. Image Credits: TechCrunch screengrab

Keep an eye out.

Tech stocks drop as Q4 begins; software shares, Facebook plunge 5%

What’s the opposite of stonks?

Shares of technology companies are sharply lower in the United States today, with the tech-heavy Nasdaq Composite falling 2.4% in early-afternoon trading.

Inside of the larger tech industry, things are even worse. The WisdomTree Cloud Computing Fund, essentially a way to trade the Bessemer Cloud Index as an aggregate, is off some 5%. The Bessemer Cloud Index tracks a basket of public software companies, which provide their services largely through hosted (SaaS) or on-demand (API) methods.

TechCrunch doesn’t bring you intraday trading updates much, but because these come on the heels of larger declines, the damage is starting to pile up.

The Nasdaq is off 7.7% from its recent highs. That’s not that bad. It’s not even a technical correction, a movement that requires a 10% decline from recent highs. A bear market, as a reminder, is a 20% correction from recent highs.

The SaaS and cloud market is in the worst shape, falling nearly 13% as of today’s declines. Public software companies are in a correction and are on their way toward a bear market if any more days like today crop up.

There’s more afoot, of course. Shares of social giant Facebook are off a little more than 5% after the company endured — even for it — a punishing news cycle in recent weeks. A whistleblower who leaked internal Facebook material came forward over the weekend, leading to another round of coverage that Facebook would like to forget.

Then, today, Facebook’s entire suite of services — Facebook, Messenger, Instagram, WhatsApp — went down due to an issue with its servers.

Shares of Facebook are off about 15.5% from recent highs, putting Zuckerberg’s empire in even worse shape than SaaS. This is despite a bullish advertising market.

All told, this is not the way that the stock market would have wanted to kick off its first full trading week of Q4. And because we’re expecting a few more IPOs before the end of 2021, it’s an ominous kickoff to the final public-offering push of the year.