US on It’s Way to Recession
As per the latest data released by the US Bureau of Labor Statistics, the US has been hit with a four-decade high inflation of 9.1%, while the country’s GDP posted negative growth for second consecutive quarter in the current year (-1.6%) in Q1 2022 and (-0.9%) in Q2 2022.
This earmarks the country’s entry into recessionary phase. Central banks are following suit to put a lid on the rising inflation phenomenon. Just recently, the FOMC came out with a rather hawkish policy to raise the Federal fund rate by 75 basis points and is yet to increase it further. As a consequence, the dollar return on US treasury yields has increased while giving respite to the greenback as it strengthens against other asset classes. The US Dollar index has also strengthened by 12% since January 2022.
Markets Came Tumbling Down
Rising inflation and interest rate came bearing bad news for investors as it spooked the equity markets. Since January 2022, Dow Industrials has lost 7% of its value whereas S&P500 went down by 12%. The impact is rather high in technology sector as the price of biggest tech stocks went down significantly. The price of smaller tech companies slipped even sharper than that of the tech giants’.
Chaos in Startup Space
The startup space has also been severely impacted primarily by liquidity squeeze with the advent of monetary tightening pausing on the historic monetary stimuli thrown by the various central banks in the wake of the pandemic. Unlike 2020, the first two quarters of 2022 saw the venture investors tending to the wounds in their portfolios. The second quarter witnessed the least amount of funding from the VC investors in late-stage tech-driven growth startups, showing a decline of 31% QoQ and 38% YoY.
Addressing the hard-hit, Sequoia Capital in its presentation warned the founders about “crucible moment’ of uncertainty in venture market space due to monetary tightening and liquidity crunch. As per the presentation, the cost of capital has increased fundamentally for investors. NFX’s Pete Flint, while carving out a framework for founders to deal with an economic crisis, too hinted at the current downturn, by suggesting that this downturn is different and bigger. However, the lack of late-stage funding was made up for in the seed-stage funding, as it grew by 9% over the last quarter.
What Does It Mean for the Tech Sector?
Let’s rewind to a couple of years back. If there’s one key driver that emerged amid the chaos that was the pandemic, it’s technology. The world might have been in a year-long quarantine but the masses soon found their way to connect remotely. Tech and tech-enabled consumer companies found a new well of growth during the trying times. Digital entertainment skyrocketed and shopping online even for groceries became the new norm. This marked a crucial turn in the fate of tech as the need to stay connected gave rise to the use of technology. From remote work to education and entertainment, from exchanging paper money to digital transactions, the journey tremendously rewarded the stakeholders of technology.
Tech stocks were in full glory as the returns rose to as high as 400% (Zoom over 300% and Peloton at 400%) during 2020. VC funding also reached new heights across all stages of funding with more tech-based startups bagging funding at seed or early-stage level. It also birthed newer advancements in the technology space (NFTs, metaverse, AR/VR, DeFi, online learning platforms, logistics, quick commerce, to name a few).
The main question one should ask now for technology outlook is, has the economic downturn changed the consumer pattern to keep the need for tech alive? The on-going developments and spending in IT paint a brighter picture for the sector’s future. According to Gartner, global IT spending is projected to grow to US$4.5 trillion in 2022, a 5.5% increase from 2021. Despite the inflation, business spending on IT is shifting towards the new normal as it consists of provisions for more cloud, remote/flexible work model and prioritizes digital transformation. With a higher job postings for remote work, employment remains a strong indicator for enterprise IT spending. According to a survey carried out by Indeed.com, about 82% of the employers conducted virtual interviews in 2021 whereas 93% planned to continue using the same mode in the future. It has also enabled employers to diversify their team by breaking the barrier of being secluded physically. Enterprise IT spending seems to be more stable as operational budgets now account for a larger share of overall spending such as in case of cloud, subscription, or ‘as-a-service’ model. Digital technological initiatives also remain a top priority for most businesses.
IT Expenditure Now a Digital Transformation Strategy
The dynamics of current enterprise IT expenditure is different from the past as businesses are approaching technology rather more strategically as a digital transformation initiative than operationally. Such initiatives include hybrid work model, multi-cloud and hybrid cloud usage, automation, analytics, better customer experience and employee experience, and supply-chain transformation, among others. The key strategy being adopted is the hybrid cloud strategy where businesses are shifting more towards cloud and ‘as-a-service.’ According to IDC, the cloud market will globally represent around 40% of the total enterprise IT spending in 2022, and 50% of spending on software will be ‘as-a-service’ by end of 2022.
…Digital Transformation is Giving Rise to Emerging Technologies
A key point to note is that digital transformation heavily relies on data, i.e., data is the key enabler of technology as there is more data to process. The shift towards multi-cloud and ‘as-a-service’ model means a high demand in emerging technologies, such as artificial intelligence, edge computing, and blockchain. According to Startup Genome, AI and big data remained the biggest sub-sector in terms of growth in 2022, with the 5-year growth rates reaching 51% in Series-A deal count, and a staggering 104% in exit count.
Data now being a business asset also elevates the need for privacy protection and prevention from potential cyber-attacks. This in turn puts cyber security as another tech that will stay in demand in years to come. According to a recent survey by Red Hat, security remained the highest concern for top IT management companies with network security and cloud security being the top most priority at 38% and 37% respectively. A surge in IoT sub-space is also expected as integration of 5G technology is enabling higher data speed and faster processing, which in turn means lower latency and better connected devices.
Growth in blockchain technology is also accelerating with use cases mainly in banking and finance (DeFi, smart contracts, etc.), supply chain, and health sector. This year, a 12% increase was recorded in early-stage blockchain funding compared to last year. As per CB Insights, web3.0 accounted for 57% of the total funding in blockchain in the 2nd quarter of 2022 with highest number of deal growth in infrastructure and development category.
So to answer the question, will the need for tech stay alive? The rising trend and spending pattern depicts that tech has paved its way through consumer’s life and therefore is here to stay as businesses explore what it has to offer. With more use cases, lower costs, and ease of use, not only has it cemented its place, it has given rise to newer technologies that are transforming the world as we write.
We foresee sustainability in the adaption and use of technology in the near future as it unfolds its potential, creates impact, and converges the global experience. This particularly bodes well for startups and technology companies which are on the forefront of digital transformation, despite any temporary funding challenges. In fact, the current recessionary cycle may ultimately bode well for digital transformation and need to adapt technology-backed innovative solutions to tackle exogenous shocks to global economy.
Malaika has earned her bachelors in Computational Finance from NED University of Engineering & Technology with distinction. Her area of expertise spans around data science, statistical techniques and models, and developing efficient mathematical algorithms to solve financial problems. Her interests include economy, investment management, technology, and data.