The $300 Billion Question of Venture Capital | The Economist

HaMoreover next puzzle. 2021 venture capitalist has raised a record $150 billion in fresh cash. Despite the market slowdown, they set another record in his 2022, raising more than $160 billion. Most of this has already been used, but nearly $300 billion of “dry powder” is waiting to be used. In fact, spending he has decreased throughout 2022. Start-up companies look cheap. So why are venture capitalists sitting on cash?

Like many other puzzles finance, the answer begins with the rapid rise in global interest rates since the beginning of last year. .tech heavy Nasdaq The index has lost more than a fifth of its value over the past year. In 2022, the amount of capital raised in stock market listings will drop to his lowest level in 32 years. Public market slowdowns, such as the one currently underway, lower the return expectations of private market investors by lowering valuations when startups “exit” into the public market. Therefore, venture capitalists demand low prices to invest in the first place.

This especially hits funding for later-stage startups, which are usually close to going public. Some companies have slowed the pace of new deals, choosing to wait for 2021 fundraising to be well-funded and things settle down. The few that continue their plans should hope to avoid the dreaded “down rounds” in which startups raise money at lower valuations than in previous rounds. their stock. Investors, on the other hand, are less willing to invest in riskier opportunities. They can no longer expect another backer to follow them in making a deal and pull it off with their expertise or raw cash.

The second part of the answer is more subtle. In theory, venture capitalists can use the money they have on hand. After all, it has already been committed to their funds. You can also avoid losing

But spending at a breakneck pace is almost certainly self-defeating in the long run. Venture capitalists regularly raise money from limited partners such as endowments and pension funds. Many of these want to reduce their exposure to venture capital as public markets take a hit and try to keep allocations roughly across different asset classes. As a result, when a handful of companies called venture capital funds asking for more money to the effect of “don’t rush back”, some venture capital fund investors says.

Venture capitalists are listening. Harry Nellis, a partner at venture capital firm Accel, estimates that cash that might have taken a year to spend during market booms can now last about three times as long. Spending can be even slower. Funds raised by venture capital funds are not actually in bank accounts. Instead, a fund must make a “capital call” to its partners Limited if it wishes to raise investment capital. This forces Limited Partners to release cash elsewhere in their portfolios. We are fully aware that the Fund wants to come back to our partners for more money in the future, so try not to irritate your partners by calling at awkward times. In fact, in 2001, during the recession that followed the dot-com bubble, some investors decided that Limited would “give back” the funds they had committed to his partners, allowing them to redistribute the funds as they wished. Did.

There are other reasons why venture capitalists are concerned about relationships with limited partners. During the recent boom, funds have begun to snort far beyond their usual concerns. Sequoia Capital, a well-known Silicon Valley company, has launched a “superfund” that includes investments ranging from traditional venture capital profits to public market equities. Some Limited Partners thought this kind of fund was ridiculously broad, but chose to buy anyway to gain access to specialized funds. No wonder venture capitalists are now slamming their hiatus and trying to mend relationships with limited partners. The industry’s world domination ambitions remain on hold, at least as long as market conditions remain dire. ■