Had been in Venture Capital (VC) till last year riding high, With interest rates near zero and yields small elsewhere, large companies, hedge funds and sovereign-wealth investors began pouring cash into startups, pushing valuations upwards. The amount of money flowing to startups is set to double to nearly $640bn in 2021 alone. Then rising inflation and rising interest rates drove the market down. Global investment in startups plunged by a third last year. Between the last quarter of 2021 and the same period in 2022, valuations of private startups declined by 56%.
The downturn essentially draws comparisons to the dotcom crash of 2000-01, when deep winter began and VC investment froze. Fortunately for both the founders and their supporters, conditions are not so cold today. Startups’ balance-sheets are stronger than they were 20 years ago; Valuations aren’t that much different from revenue. In America alone, venture capitalists are about $300bn in dry powder, However, the industry that is emerging from technical recession And in the era of dear money he looks different from the era that went into it. In many ways VCs are returning to decades-old ways.
One shift has been to focus on smaller, profitable firms. It’s a habitual investment that is sometimes forgotten in boom years, when fast growth and the expectation of big profits tomorrow were valued over today’s profits. Many backers who were looking for a quick return piled into older, “late-stage” startups that will probably go public sooner and assure higher valuations.
Today, however, stock markets are volatile, making it difficult for venture investors to assess the value of late-stage startups. As interest rates have risen, losers have fallen out of favor: Share prices of unprofitable tech companies have declined by two-thirds since November 2021, according to an index compiled by Goldman Sachs. VCs are also telling their portfolio firms to tighten up. their belts and generate cash. Increasingly their new bets are on young firms, and those that are cutting costs fast are likely to turn a profit sooner.
The second change is the renewed emphasis on strategic firms. In an echo of the early days of VC, when investors often backed semiconductor-makers competing to win large public contracts, today many are eyeing firms in sectors that have been under pressure from governments for industrial policy. stand to benefit from K’s new hobby. For example, administrations in both the US and Europe are planning to spend hundreds of billions of dollars on chip firms and those supporting the clean tech.
Venture capitalists, naturally, know how to spot an opportunity. Silicon Valley investing giant Andreessen Horowitz has launched an “American Dynamism” fund that partly invests in firms that receive backing from Uncle Sam. Other venture investors, including Singapore’s sovereign-wealth fund Temasek, say they are raising their investment hopes. To align with the states strategic objectives.
A final change in the approach of VCs is the emphasis on better governance. In the boom years too much venture money chased too few good investments. The mismatch gave the founders the upper hand in negotiations, allowing them to conduct relatively mild oversight. After the spectacular blowout last year of FTX, a venture-backed crypto exchange, it became clear that none of FTX’s major venture- and sovereign-fund investors had taken a seat on the startup’s board, said Sam Bankman-Fried, founder, and their allies entirely to their own devices.
Getting venture finance now is tough. Tiger Global and other funds which were earlier hand-offs have started pulling back. Other investors say they intend to take their board seats. This reduces the power of the founders to set the terms and should improve governance. A lack of venture dollars may also encourage startups to go public sooner, as Trustbusters may face more scrutiny. large technology acquisition, The knowledge that they may soon face scrutiny in the public markets can also discipline founders.
plant seeds
This new sobriety will not last forever. Venture capitalists are, by nature, excitable: see the discussion on generative artificial intelligence. Some hedge funds have abandoned venture investing after past downturns when valuations have adjusted. Over time the cycle will surely turn once again, sending VC investing to dizzying heights. For the time being, though, the old ways are back—and it’s a welcome change.
© 2023, The Economist Newspaper Limited. All rights reserved. From The Economist, published under license. Original content can be found at www.economist.com
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