Red-hot startups face a year of down rounds

LONDON, Dec 29 (Reuters Breakingviews) – The startup frenzy is due a pause. Venture capitalists had invested more than $600 billion around the world by mid-December, twice the total for 2020 and an all-time high, according to PitchBook. As global markets wobble and central banks toy with raising interest rates, once-hot private companies will confront lower valuations in 2022.

Buoyed by strong historical returns, venture capitalists are flush with cash. Meanwhile, low interest rates have lured pension funds and firms like Tiger Global into backing riskier young companies. Software startups were the main beneficiaries, amassing over $190 billion in 2021, buoyed by trends like remote working and the digitisation of business processes. Fintechs like $46 billion buy-now-pay-later firm Klarna and rapid grocery delivery companies such as $15 billion Gopuff were also popular. So-called “frontier tech”, which includes space, transportation and robotics, is another hot sector.

The inflow of money has pushed prices ahead of financial performance. In 2021 the median late-stage investment in U.S. frontier tech was struck at a multiple of 32 times revenue, up from 20 times in 2020, according to Silicon Valley Bank data. But the median revenue growth rate of those companies was 26%, lower than other sectors.

Meanwhile, public markets are becoming less welcoming. UiPath’s (PATH.N) U.S. initial public offering in April 2021…