Two of the biggest frauds in tech history bookended 2022.
On the first trading day of last year, blood testing start-up founder Elizabeth Holmes was found guilty on four counts. Theranos had been valued at over US$9 billion at the height of the fraud in 2015.
As the year drew to a close, Sam Bankman-Fried, founder of crypto exchange FTX Trading, was arrested in Bahamas. He is currently on bail at his parent’s home awaiting trial. Before its collapse, FTX was valued at US$32 billion ($42.8 billion).
This time last year, valuations for both listed tech firms as well as private venture capital-backed start-ups were at, or fairly close to, all-time highs, as money continued to pour into what was seen as a high-growth sector.
One year on, tech is reeling. The S&P Information Technology Sector index was down 29% last year, compared to a 19.9% drop in the benchmark S&P 500 index.
The top five tech giants — iPhone maker Apple, software powerhouse Microsoft, e-commerce giant Amazon.com, search engine supremo Google’s owner Alphabet and Facebook’s owner Meta Platforms — had US$3.9 trillion in market capitalisation wiped out in 2022.
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Big tech apart, rising interest rates are also pressuring unprofitable tech firms that are unlikely to make money for several years. Risk capital is fleeing and VC-backed start-ups have seen valuations ratcheted down substantially in new funding rounds. Grocery delivery firm Instacart, which was valued US$39 billion in a 2021 funding round, recently had its valuation slashed to US$10 billion.
The hardest-hit segment has been unprofitable, long-gestation enterprise software stocks. A year ago, investors were happy to pay up to 50 times sales for some high-flying software firms. Now, they insist on seeing actual profits.
Messaging software provider Twilio, for instance, has seen its stock plunge 89% from its peak. That is despite private equity (PE) firms having bought out some of the unprofitable software firms this past year. Thoma Bravo LP last month acquired Coupa Software for US$8 billion, outbidding Vista Equity Partners, a rival which has been busy buying distressed software names. Don’t expect PE firms to help lift valuations of the software sector anytime soon, though.
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For years, tech was the sector that added to employment growth in the US. Software or hardware engineers would join tech firms like Google, Apple and Facebook with hefty sign-on bonuses, stock options and other perks.
Now, big tech firms are in a race to see who can lay off more staff. Under pressure to cut spending, Meta recently laid off 11,000, or 13% of its total workforce. Amazon, one of America’s top employers which added over 200,0000 jobs during the pandemic, has laid off 10,000 workers. But just as some firms are firing, others are still hiring, particularly software engineers with expertise in artificial intelligence.
One of 2022’s most-talked-about tech deals was the US$44 billion acquisition of microblogging firm Twitter by the then world’s richest man, Elon Musk. Twitter has taken on US$13 billion in debt as part of the deal. That’s over US$1.5 billion in annual interest payments. Musk has also taken US$14 billion in margin loans, pledging his EV maker Tesla shares as collateral.
Meanwhile, Twitter’s ad revenues have halved, in part because of the economic slowdown but also because it is now seen as a more toxic platform that few advertisers want to be associated with. By associating with right-wing Republicans, Musk has antagonised the car maker’s fan base of liberal climate-change believers.
Musk’s association with the microblogging site and close ties with the extreme right-wing will not win him new customers for Tesla at a time when the economy is slowing and new electric vehicle competition from both legacy car makers and start-ups is coming on stream. Tesla’s stock plunged 70% last year, and a further plunge will force Musk to sell more Tesla stock to avoid margin calls.
Crypto winter may last a while longer
In the aftermath of Bankman-Fried’s alleged brazen embezzlement of US$8 billion from client accounts in FTX to prop up his own hedge fund Alameda Research, the completely unregulated crypto ecosystem is on regulators’ radar screens as well. In Washington DC these days, you hear two narratives.
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First, cryptocurrencies and everything around them need to be heavily regulated immediately to prevent another scruffy-haired, T-shirt and a shorts-wearing guy like Bankman-Fried from trying to entice everyone, from unsuspecting fanatics who love it like a pet rock to politicians who went gaga as he showered them with political donations, to prominent venture capital investors like Sequoia Capital, which invested US$214 million in FTX and posted a 13,000-word glowing profile on its website.
The other narrative is that there is no immediate need to regulate cryptos because regulating them will be akin to “legitimising” them. Bitcoin, the largest, is down 75% from its peak in late 2021, while some of the lesser “coins” are down more than 90% from their peaks. Standard Chartered Bank forecasts Bitcoin could fall to US$5,000 this year before rebounding.
Clearly, the selling in cryptos is far from over as pressure mounts on exchanges like Binance, and its Chinese-Canadian founder Changpeng Zhao or CZ, who played a key role in the collapse of FTX. Until the scrutiny of Binance is over, giving cryptos a Good Housekeeping Seal of Approval in the form of regulation makes no sense.
Regulators could mean more stringent registration and reporting requirements for companies that want to run exchanges and other crypto transactions. Much of the policy and regulatory discussions in Washington had centred on whether cryptocurrencies should be regulated as commodities or securities.
US Securities and Exchange Commission (SEC) has been adamant that almost all tokens trade like securities, which would put them under the purview of the SEC. The Commodity Futures Trading Commission noted in its own suit on Dec 13 that Bitcoin, Ether and Tether — a stablecoin pegged to the US dollar— are commodities.
I believe the future is in digital currencies. But don’t get me wrong. Although I am sceptical of cryptocurrencies and believe that 99.9% of coins, like FTX’s FTT coin could be fraudulent, and have no future, I do believe in the underlying blockchain technology.
Not only will all sorts of funky coins soon be in the dustbin of history, but also the stable coins that are purportedly linked to certain fiat currencies. Stable coins based on the US dollar or euro, issued by some crypto billionaire or even a crypto institution, make no sense to the respective central banks or indeed to consumers. Witness the collapse last May of Terra Luna and its UST coin.
However, I believe that central bank digital currencies (CBDCs) or the cryptocurrency versions of the US dollar, euro, Singapore dollar or yen issued by central banks will probably be in our future.
We might not see CBDCs soon but will certainly see them over the next 10 years. Why? Because physical currencies are not only expensive but are also difficult to police. CBDCs will give central banks and regulators a way to clamp down on money laundering and give governments more visibility on many forms of corruption.
Imagine there was no hard physical cash and all financial transactions were digital, and we only got paid digitally and made out payments only digitally. Every cent you receive or pay out could potentially be traced.
While digital currencies will help cut down a lot of crime, they will also probably breed new forms of crime and corruption. But the overall impact will probably be positive, not negative, for most societies. If the government could track most of the money going into your wallet, everyone would pay their fair share of taxes and the overall tax rate would be lower, not higher.
Sure, loss of privacy will be a huge concern, but once the world embraced Facebook, WhatsApp, Instagram and other social media, no one can really pretend to have any kind of privacy because we gave those apps permission to constantly track us, monetise all our personal data and make fat profits for their owners.
Let’s face it: We surrendered our privacy a long time ago by using social media apps every day. If you still yearn for the sort of privacy that your grandparents’ generation had, blame Mark Zuckerberg and his ilk, not the new digital payments ecosystem or the upcoming CBDCs.
This past year, the world found out that the metaverse was what Americans call a Nothing Burger. About 13 months ago, Zuckerberg bet the farm on the immersive virtual world. Facebook rebranded itself Meta Platforms and announced it was ready to spend up to US$100 billion on the metaverse.
A year later, he is having a rethink. He realises that it could take 10 years before we will see a semblance of a metaverse that rakes in meaningful revenues. Under pressure from shareholders, Meta has started to tone down expectations and has implemented job cuts and slashed spending on infrastructure. Meta’s stock is down 65% over the past year — its biggest single-year loss in history.
American economic nationalism
A big development on the tech front last year was the aggressive semiconductor export controls targeting China by US President Joe Biden’s administration.
Congress passed a new law called Creating Helpful Incentives to Produce Semiconductors Act, or the CHIPS Act. The law facilitates subsidies to US firms to build chip plants on American soil. Chip foundries like Intel and GlobalFoundries, and memory chip firm Micron Technology, are now building plants in the US.
Overseas firms like Taiwan Semiconductor Manufacturing and South Korea’s Samsung Electronics, which already have plants in the US, are adding more customised chip plants.
Washington has banned US and other Western chip firms from exporting higher-end chips to China to stunt its growth, and listed dozens of Chinese firms that will be denied access to US technology. On Dec 7, the US added 24 companies to its “Entity List” of Chinese firms that have been blacklisted from acquiring sophisticated Western technology.
So far, China’s response to the hostile moves has been tepid at best. China needs US technology and for now is willing to let Washington decide what technology it will allow. Analysts say that stance may embolden Biden to extend the White House campaign of economic nationalism beyond chip restrictions and domestic manufacturing subsidies.
How far Biden will go and how much pain Beijing can take could be clearer in the first few months of the new year when Washington begins negotiations with TikTok’s Beijing-based parent Bytedance over data privacy.
One thing is clear: Bytedance will not be forced to sell its entire stake in TikTok, but it will have to bring all its cloud servers to the US to prevent Beijing from peeking into the personal data of young Americans.
TikTok has, in the past, negotiated with Oracle Corp as a potential cloud services partner. If Oracle wins the TikTok contract, it will become the fourth-largest cloud infrastructure firm in the US behind Amazon, Microsoft and Google. Cloud services remain the fastest-growing and the most lucrative segment of tech.
As interest rates continue to rise this year, expect to see more “pain” for the tech sector. There will be more scams uncovered, though not on the scale of Theranos of FTX. But out of the unfolding tech wreckage, we will see new leaner and meaner start-ups using an array of new technology — including quantum computing, artificial intelligence and robotics process automation — emerge to help kickstart a new cycle of innovation and growth.
Assif Shameen is a technology and business writer based in North America
