Is risky the new safe?
Macro trends have toppled giants all year. Early-stage startups may be relatively sheltered from the storm.
Whether you’re investing or choosing a job, the Fed’s choices may decide your outcome more than your own choices. Unpredictable interest rates affect the whole market, albeit not equally. In one respect, this favors early-stage startups, and smaller may actually be safer.
New startups aren’t (yet) valued based on discounted cash flows or as a multiple of revenue. In growth-stage and mature companies, those calculations allow tiny interest rate tremors to cause seismic valuation swings. The resulting volatility hurts both investors and employees.
The younger a startup is, the less their valuation is based on a multiple. Seed-stage valuations are based on the team and idea; it may be years before they’re valued based on any multiple. A well-funded early startup may therefore be the stablest place to work or invest today.
Of course, startups face existential risks, many of which are aggravated by rising rates. This isn’t new. What’s new is that big companies offer less stability today than they used to. A startup may still be riskier than Microsoft, just “less riskier” than before.
Rising interest rates have decimated public tech stocks and growth-stage startup valuations this year. Early-stage startups have dropped too, just not by as much. Even pundits predicting a long winter make caveats for seed-stage startups.
In our portfolio at Neo, many of the early-stage startups have recently raised new rounds at record valuations and now have years of runway. Among Neo Scholars, a few who joined big companies have been laid off; not so for those who joined startups.
If there’s a silver lining in the macro-driven market meltdown, it’s that a new generation of technologists may become less easily seduced by the illusion of stability and less afraid of the prospect of risk.
I’ve spent years at Neo mentoring college students. I spoke to one recent grad who lost her job at Facebook. She told me that the experience made her feel less afraid. She now feels more free to pursue her dreams, including starting her own company or joining a startup.
As more people see that size doesn’t confer security, hopefully more will follow in those steps. Whether you’re picking a job or investing cash, it’s a great time to bet on early-stage startups. It was always the highest-growth path; now it may even be the safer one.