“Are valuations of tech companies falling?” opinion by Karol Zielinski
Are valuations of tech companies falling? Yes, the numbers confirm it. Karol Zielinski, an experienced executive and senior manager in companies like Deor, z3x Tech Marketing Agency, and mPay, takes a closer look at this trend on his LinkedIn page. AIN.Capital shares the contents of his publication.
“Are valuations of tech companies falling? Yes, the numbers confirm it. Inspired by a recent post by Pawel Maj, I decided to take a closer look at this trend. Because, well… I don’t see anything wrong happening.”
Do we have a major problem in the tech market? No. And here’s why:
- Valuations are still high. Valuations at 11.9x EBITDA or 3.1x revenue are still considered high valuations. Many industries would dream of such valuations.
- The median EBITDA multiple of 11.9x is higher than in 2014. The median revenue multiple of 3.1x is similar to valuations in 2013, 2014, and 2017. These are normal valuations.
- In recent years, we witnessed inflated valuations driven by various well-known factors (COVID-19, cheap money, accelerated digitization of virtually all aspects of our lives). Valuations at 19.5x EBITDA? Did anyone seriously think that would last?
- A lot of companies have been over-investing and over-hiring for the past few years, so when the market came back to normal and their businesses weren’t growing as fast as they thought, they had to start cutting back. And because the media picks up headlines about layoffs, it looks from the outside like something really bad is happening.
- The approach to startups has changed. It’s no longer enough for them to grow at all costs. They need to capture the market but also make money, increase revenue, and optimize costs.
- Bad press leads to more bad press. This is evident in the fintech industry. Huge fluctuations in cryptocurrencies have resulted in a lack of trust in such assets. The FTX scandal shook faith in innovative financial technologies. Large drops in valuations of giants like Worldline, Adyen, Stripe, Klarna. These articles get clicked on, and because there have been many of them in recent months, they distort the overall picture of the industry.
“So, are we witnessing a major problem? No. We have a correction that is normalizing valuations of tech companies. And that’s a good thing. The sooner valuations return to normal, the sooner companies will stop being overambitious and focus on their businesses. Consequently, they will return to growth more quickly.”
As for the rest? Well, some will be acquired, and some will fail. That’s how it has always been in business. And that’s how it will be now.