Venture capital’s silent crash: when the tech boom met reality

When the stock market crashes or ‘corrects’, you can see that right in front of you and, if you are so minded, you can do something about it. In the case of VC investing, as this piece in last week’s 3 longs & 3 shorts highlighted, there is very little an investor in VC funds can do about a crash: https://www.collaborativefund.com/blog/breaking-points/ However, as Richard Walters of the FT explains, “The venture capital world is in the grip of a silent crash…In fact, for many of the investors and entrepreneurs who have just lived through a historic boom in venture investing, it is even possible to pretend a crash isn’t happening at all. Loose rules that require only sporadic writedowns, the estimated value of private companies, have made it easy for many to turn the other way.
Josh Wolfe, co-founder of Lux Capital, likens the response to “the classic five stages of grief”. “We’re probably somewhere between anger and bargaining,” he says, referring to the emotions that follow denial. Yet investors and company founders, Wolfe adds, are still resisting the full implications of a market downturn…” The article goes on to explain how many VC funded companies who are still in denial about the downturn are running around trying to raise money.
The author then quantifies the astonishing surge in VC funding which took place when Covid-19 was in full cry: “The scale of the most recent venture boom has dwarfed that at the end of the 1990s, when annual investment peaked at $100bn in the US. By comparison, the amount of cash pumped into American tech start-ups last year reached $330bn. That was twice was much as the previous year, which was itself twice the level of three years earlier.
The flood of money into the private markets was matched by an equal flood into IPOs. According to Coatue, one of a new band of “crossover” investors that moved from the public markets into the VC world, $1.4tn found its way into promising growth companies globally last year, half of it in the form of venture capital and half through IPOs. That single-year surge, it calculated, was nearly $1tn more than the average of $425bn a year raised over the previous decade.”
This surge in funding led to bad investments by VC investors which now necessitates a round of “puking”. Already some prominent VCs have announced losses which in the context of listed market investing would be seen as nerve shattering: “…new investors that set the tone as venture investments ballooned included SoftBank’s Vision fund, which ploughed $100bn into the market. Tiger Global, which spread its bets widely, at one stage held more stakes in $1bn start-ups than any other investor. Both have since disclosed shattering losses: the Vision Fund registered a one-year loss of $27bn in May, the same month it emerged that Tiger had lost $17bn.”
What will happen as the money dries up? The article lists a host of formerly hot sectors which now seem headed for a long barren period: ““There’s a lot more commercial activity” in areas of space exploration and research that were once considered the province of governments, says Forczyk. If the money dries up, she says, “I don’t know if it’s going to be sustainable.”
Back on Earth, venture investors have been left reassessing bets in fields that were once considered among the hottest fields for start-ups. Howard Morgan, chair of New York venture firm B Capital, singles out the tech industry’s various attempts to revolutionise the transport sector as one cause of regret. The driverless car and electric scooter companies his firm invested in no longer look like they’re about to change the world, he says….“We’ve realised maybe the world isn’t ready for as many of these things as we thought,” says Morgan.
Asked which sectors are likely to prove the biggest disappointments, most venture investors list the same handful: the ultrafast delivery companies, like Gopuff and Gorillas, that have set out to bring customers their grocery items in as little as 20 minutes; fintechs that embarked on an expensive campaign to build large consumer businesses; and blockchain-based ventures that have been caught up in the crypto crash.”

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