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DF: I mean, right now I think the big challenge all entrepreneurs and investors are facing is these kinds of gaps in capital that may keep certain projects that have a good technology shot from actually getting across to the other side of the chasm, right? So if you look at public biotech companies, about 45% of them are trading below cash. Now, what that is telling you is that most biotech companies, when they hit a successful outcome on a clinical trial or when they’re close to, they go out and they raise more money to keep funding the clinical trials and hopefully get the product across the finish line. That’s a good example of what’s needed in a lot of ag tech that’s going on right now in precision fermentation and cellular meat. And some of these emerging categories we’ve been talking about is you need capital that as these businesses hit key technical milestones, they’re able to get funded to get to the next technical milestone and get across the chasm. They’re not profitable businesses on day one because they’re big technology builds. And so in a market environment like this where capital is saying, “I would rather invest in things that are going to pay me 5% a year this year or next year versus making five times my money 10 years from now,” you’re seeing all the money move to the near term. And that’s because of the way interest rates have been adjusted associated with problems with inflation, and other macroeconomic conditions.
“Right now, there’s a real capital problem…And so many investors have been trained in the last 15 years to be momentum investors” – David Friedberg, founder of Climate Corporation
So right now, there’s a real capital problem. These big projects that historically have been fundable are becoming less fundable, and as they become less fundable, the seed investors don’t want to invest in ’em because they’re afraid the A investors aren’t going to be there, who are afraid the B investors won’t be there, and no one wants to come and pick up the scraps of the company that’s now getting priced in a down round.
And that’s the other problem. So many investors have been trained in the last 15 years to be momentum investors. You invest in stuff when it’s going up. You don’t invest in stuff when it’s going down. In the last year, the index for growth stocks have declined by 70 to 80%. So everything is down 80%. So all private companies should be down 80%. So if you raised money at an A or a B valuation of a hundred, are you now worth 20? And if you’re worth 20 and you’ve raised 40 million in cash, you’re now worth less than your preference stack. And that’s the wall that everyone’s starting to hit because the investors that would do late-stage investing are really nervous to fund a company that’s now worth less than their preference stack. And you’ve got to go negotiate with the existing investors and recap and restructure.
It doesn’t mean the companies are valueless; it doesn’t mean that there isn’t something good there. It just means that the value now with all public companies, public biotech and growth stocks is worth less than the cash that’s gone in. And so there’s a real kind of reset that’s happening right now.
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