Singaporenewslive

Years of easy money turn into tough times for tech companies

NEW YORK – Eighteen months ago, online used-car retailer Carvana had big prospects of being worth US$80 billion. (S$105.7bn) Its valuation is now below $1.5bn, a 98% plunge and struggling to survive.

Many other tech companies are also seeing their fortunes reversed and their dreams fading. They cut their workforce and watch financial valuations shrink, even as the larger economy is reeling with low unemployment in the third quarter and 3.2% annual growth.

This is one of the most unaccepted explanations. The era of unprecedented lowest interest rates ended abruptly. Money is no longer virtually free.

For more than a decade, investors have been pumping money into Silicon Valley, desperate for a return, and Silicon Valley has pumped money into a variety of start-ups that might not have been able to nod in less vibrant times. . Extreme valuations have made it easier for them to issue shares, take out loans to expand aggressively, and offer sweet deals to potential customers that have rapidly boosted their market share.

It was a boom that seemed to never end. Technology racked up victories and its competitors withered. Carvana built dozens of flashy car “vending machines” across the country, touting them relentlessly and offering very attractive trade-in prices.

Sam Abuelsamid, Principal Analyst at Guidehouse Insights, said: “Now they are facing a new reality and they will pay the price.”

Many of the acquisitions that replaced organic growth in technology were financed cheaply. Two years ago, with a pandemic raging and many office workers stuck at home, Salesforce purchased his office communication tool, Slack, for his US$28 billion. Salesforce borrowed $10 billion to make this deal. This month, the company said it would cut 8,000 of his jobs. That’s about 10% of the staff, many of whom are Slack employees.

Even the biggest tech companies are affected. For years, Amazon happily lost money trying to acquire new customers. Recently I’ve taken a different approach, Laid off 18,000 office workers A closing operation that is not financially viable.

Carvana, like many startups, pulled pages from Amazon’s old playbook to try and get big fast. I believed that used cars, like taxis, bookstores and hotels, were a highly fragmented market ripe for reinvention. It strives to outperform all competition.

The company wanted to replace traditional dealers with “technology and outstanding customer service.” Where traditional dealerships were literally flat, Carvana built a multi-level car vending machine that became a memorable local landmark. Customers have now received their cars in a total of 33 towers.

In the third quarter of 2021, Carvana delivered 110,000 vehicles to customers, up 74% from 2020. The goal is 2 million cars per year and to be by far the largest used car retailer.

After that, the company collapsed faster than it grew. Supply problems arose when used car sales rose more than 25% of his in the first year of the pandemic. Carvana needed more cars. The company bought an auto auction company for his $2.2 billion and took on even more debt at a premium rate. And it paid the customer a lot for the car.

But once the pandemic subsided and interest rates started rising, sales slowed. Carvana said he had one layoff in May and he had one in November. The company’s CEO, Ernie Garcia, blamed the rising cost of funding, saying, “We couldn’t predict exactly how this would play out.”

Some competitors do even worse. Vroom’s stock has fallen from $65 in mid-2020 to $1. In the past year, we have laid off half of our employees.

“High interest rates are painful for most people, but especially painful for Silicon Valley,” said Chiron Xiao, associate professor of finance at Columbia Business School. “We expect more job cuts and investment cuts unless the Fed lifts its tightening.”

At this point, that is highly unlikely. The market expects two more rate hikes by the Federal Reserve this year, to at least 5%. NYTIMES

https://www.straitstimes.com/business/for-tech-companies-years-of-easy-money-yield-to-hard-times Years of easy money turn into tough times for tech companies

Exit mobile version