Momentum in business is like a slingshot.
The further you pull the slingshot back, the more forceful the reaction in the opposite direction. The tension can build slowly or all at once.
In the last two years, we've seen more examples of this than at any other time in recent memory.
- Crypto investments move into NFTs
- Tech investing hit all-time highs in valuation and dollars allocated in both the public and private markets
- Climate tech investing went into riskier and risker assets, some that won't generate revenue until 2025, much less returns.
The side effect of momentum is that it pushes investors into riskier assets at higher prices. But, at some point (now), the momentum stops, and the risk appetite does almost a complete 180 seemingly overnight.
Companies seldom prepare well for the opposite reaction.
In each example above, the momentum has swung violently and companies have shown they are ill-prepared.
- Crypto is down 80% from highs, with exchange bankruptcies now occurring weekly.
2. Startup funding is down, and public tech multiples are off 75% from November. Burn rates were high, and now layoffs are happening daily.
3. Climate mega funds are now appropriately pricing hardware and tech risk into deals that might have commanded a premium just 6 months ago.
Overall, climate tech startups are riding a wave of incredible momentum - one that's likely to survive any pending market headwinds better than most.
But, momentum is fleeting, and for the next 18-24 months, we should be aware of that.