Unlike the stock market, there are no daily market indices to broadcast the pain and no individual stock prices for anxious tech workers to watch as their personal wealth evaporates. In fact, for many of the investors and entrepreneurs who have just experienced a historic boom in venture capital investment, it is still possible to pretend that a crash is not happening at all. Lax rules requiring only sporadic write-downs, the estimated value of private companies, have made it easier for many to turn in the opposite direction. Josh Wolfe, co-founder of Lux Capital, likens the answer to “the classic five stages of grief.” “We’re probably somewhere between anger and negotiation,” he says, referring to the emotions that follow denial. But investors and company founders, Wolfe adds, are still bracing for the full impact of a market downturn that will have a profound impact on the startup economy.
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Only companies with an urgent need for capital have been forced to fully reckon with reality, as investors investing new money demand an updated valuation. Klarna, the Swedish buy now, pay later company, shocked the market for private fintechs earlier this month when it raised money at a $5.7 billion valuation – 87% less than venture capital backers thought it would. it was worth a year ago. However, this wild price cut merely echoed a turnaround that had already begun for similar companies in the public markets. Shares in Affirm, a US buy-now-pay company that went public early last year, have also fallen 87 percent since peaking last November. Fast-growing fintech firm Block is down 78% after shedding $130 billion from its market value. Many more will have to follow Klarna’s lead before the full extent of the rollback collapses. Despite some signs that people are becoming more realistic about valuations, “We don’t have the full momentum that’s needed yet,” Wolfe says. “Many companies will refuse to change valuations until they run out of capital,” adds David Cowan, a partner at Bessemer Venture Partners. Sebastian Siemiatkowski, CEO and co-founder of Klarna. Many more will have to follow Klarna’s lead before the full extent of the rollback collapses © Magnus Hjalmarson Neideman/SvD/TT/Alamy Venture Capital’s delayed date with reality, when it comes, will be a watershed moment for the startup world. Investors of all stripes have crashed the world of the VC club in recent years in pursuit of companies that promise higher growth rates than those available on the public market. Much of that investment poured in last year as private startup valuations peaked. Hedge funds, private equity firms, sovereign wealth funds, corporate VCs and mutual funds between them provided two-thirds of all money allocated to venture capital investments globally last year, according to data provider PitchBook. If these bets are bad, it could lead to the retreat of many of the newcomers attracted to venture investing. And that, in turn, could come as a shock to a tech startup world accustomed to ever-increasing amounts of capital.
The largest funding rounds for US startups in 2021
The scale of the most recent boom in venture capital waned in the late 1990s, when annual investment peaked at $100 billion in the US. By comparison, the amount of cash pumped into US tech startups last year reached $330 billion. This was double the previous year, which was itself double the level three years earlier. The flood of money in the private markets was matched by the same flood in IPOs. According to Coatue, one of the new “crossover” investors moving from the public markets to the VC world, $1.4 trillion found its way into promising growth companies globally last year, half of it in the form of venture capital. risk and half the IPOs. That one-year increase, he estimated, was nearly $1 trillion more than the average of $425 billion a year raised over the previous decade.
Fear of loss
Lured by this huge influx of capital, many venture capitalists now admit that their market has been overtaken by a race to invest at almost any price – although most like to claim that their own funds have been able to ride out the worst of the excesses. “If there was one word to describe it, it was Fomo,” says Eric Vishria, partner at Benchmark Capital. The “fear of missing out” he points out has brought turmoil to the top of the market. It wasn’t just the high prices that investors were willing to pay to avoid missing the boat: due diligence periods were drastically reduced and protections that investors normally use to protect their investments fell by the wayside. The steady economic expansion and loose financial conditions that followed the financial crisis more than a decade ago had led many investors to view venture capital as a one-way bet, Vishria says. “For the past 12 years, the right answer for almost every company has been simply to own and distribute [the shares] later,” he adds.
The most valuable private startups, based on recent fund raisings
“Incentives lined up to keep companies private and do bigger and bigger rounds of funding,” adds Phil Libin, a venture capitalist and former CEO of note-taking app Evernote. For the companies’ founders and employees, as well as the venture firms that backed them and the limited partners that provided the capital, it was like a gravy train. As valuations climbed higher, companies created share-trading programs for employees and executives to cash out, and investors were able to mark their valuations with each new round of capital. As a result, according to Vishria, the venture capital industry has swelled. Many companies have remained private much longer than is usual for a start-up, relying on private investors rather than going public. The size of venture capital skyrocketed as investors put ever larger amounts of capital to work. And investment discipline has loosened, with VCs spreading their bets widely across entire sectors rather than trying to single out the small number of big winners that have traditionally provided the lion’s share of industry profits. New investors setting the tone as venture capital increased included SoftBank’s Vision fund, which plowed $100 billion into the market. Tiger Global, which spread its bets widely, at one stage held more stakes in $1 billion startups than any other investor. Both have since revealed devastating losses: the Vision Fund posted a loss of $27 billion for the year in May, the same month it emerged that Tiger had lost $17 billion. At the height of the boom, investors rushed to back everything from electric vehicle companies like Rivian, which raised more than $5 billion last year, to fringe technology bets betting on major scientific breakthroughs to generate returns, such as nuclear fusion . “The inbox [interest] it’s been crazy,” with two or three unexpected funding offers a week, says Jeremy Burton, a former top Oracle executive who now runs a privately held software company called Observe. Those approaches have stalled, he adds — a reflection of the deep chill that has gripped the venture capital market as entrepreneurs and investors wait for reality to sink in and a new consensus on valuation levels to emerge. With Nasa planning a return to the moon, private companies hoping to lead in its wake are already planning lunar activities ranging from mining to building cloud computing centers © NASA/AFP/Getty Images
High risk projects
The overflow of capital pushed new fields of science forward at a faster pace. They included technologies like quantum computing and driverless cars, “moonshot” projects that were once considered too risky or long-term even for venture capital, which typically takes a seven- to eight-year view. Significant progress has been reported by startups in both areas, although the truly transformative breakthroughs that venture investors have been hoping for remain elusive. This treasure also helped open up new risky sectors of the economy to private start-ups. The amount of money flowing into commercial space startups, for example, doubled last year to more than $15 billion, according to BryceTech. In the middle of the last decade, annual investments were around $3 billion per year. Private investment has supported a wealth of new rocket technologies, satellite systems and earth imaging services. But startups have also ventured into the frontiers of space exploration, says space analyst Laura Forczyk. With Nasa planning a return to the Moon, private companies hoping to lead in its wake are already planning lunar activities ranging from mining to building cloud computing centers. “There’s a lot more commercial activity” in areas of space exploration and research that were once considered the province of governments, Forczyk says. If the money dries up, he says, “I don’t know if it will be sustainable.” Back on Earth, venture capitalists have been left to reassess bets in areas once considered the hottest fields for startups. Howard Morgan, president of New York venture firm B Capital, singles out the tech industry’s various attempts to revolutionize transportation as a cause for concern. The driverless car and electric scooter companies his company invested in no longer look set to change the world,…
