During the ZIRP years, a lot of startups raised a lot of capital (without developing a concurrent ability to generate significant FCF). In the aftermath, some of these startups have become "ghost ships" that are holding people and investors together, rowing toward a hill that keeps getting further away.
In the long-run, stakeholders (investors, founders and employees) make money in the business either through dividends or via significant jumps in share price. In the post ZIRP years, valuations are now closely tied with the ability to generate FCF. Startups that raised a lot of capital and were ultimately unsuccessful at building proportionately large streams of FCF are extremely unlikely to deliver financial returns to any stakeholders.
Impact on Latest Investors:
In 2021, let's assume Company X raised $50m in venture financing at a $200m postmoney valuation in a Series A round. In the post ZIRP years, early-stage technology companies are valued at a an annual EBITDA to valuation ratio of 1:15. A Company that generates $1m in annual EBITDA is valued at $15m. With these multiples, Company X must generate EBITDA of $30m+/year to qualify for a valuation that is higher than the last round.
Very few companies are ultimately able to develop the sheer scale that is required to generate $30m+/year in EBITDA. The requirement to do that in a few years makes it extremely unlikely for Company X to get there. In all likelihood, the latest investors that invested $50m at a $200m postmoney valuation will not see a return.
In recent years, a lot of companies got carried away with raising a lot of capital and building a large base of shareholders (without developing the ability to scale significant FCF). Among many others, Hunter Walk has previously written about this from a venture perspective.
Impact on Founders / Early Investors:
In these startups that are now operating as "ghost ships", the impact on founders and early investors is actually the most paralysing. In case of a liquidity event (I.e. company getting acquired or going public), investors that invested most recently have the first right to make their money back (before proceeds are offered to earlier investors). Probabilistically, earlier investors are even less likely than the latest ones to see any capital being returned. And since founders are further down in the preferred stack, they will see an exit payout only in the event of a really large acquisition ($200m+).
In the ZIRP era, founders and early investors partnered closely to raise as much capital as possible. Today, those decisions have created ghost ships. The only remedy here seems to be a fundamental recapitalisation of the cap table.