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June 2022
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PE Panorama: Lustre wears off venture capital

VC
By Paul Mackintosh   
April 25, 2022

Feeling venturesome? You may not be after you read this. According to new data from CB Insights, global venture capital investment declined at the largest quarterly pace in almost a decade in the first three months of 2022, shrinking 19% from the preceding quarter to US$144 billion. This accompanied a near 40% plunge in initial public offerings and special purpose acquisition vehicles.

Now, according to the Financial Times and other news reports, the selloff in public technology stocks has spread to valuations of pre-listing venture capital-backed private companies. The FT quotes Forge Global, a platform for trading in private startups, as saying that average prices of the startups it trades have fallen almost 20% since the final quarter of last year. Hot 2021 tech IPOs such as Singapore’s Grab and India’s Paytm have slumped drastically since their debut.

This data point joins numerous others indicating a pullback in tech venture investment. The S&P 500 Information Technology Index, which tracks tech stocks in the S&P 500, is down 9% from its previous highs, almost 5% worse than the overall S&P 500.

Suzanne Fletcher, general partner at Prime Movers Lab, was quoted in Forbes saying that venture funds and venture-backed companies would both hold on to their capital for longer in the face of uncertain market conditions. In other words, they're not investing and not growing. She also forecasts valuations retreating from recent “stratospheric highs”.

This trend in private companies heralds the return of the dreaded down rounds, where privately-held startups and growth stage companies are revalued lower than their previous rounds due to changing market conditions. (Of course, “changing market conditions” may be a euphemism for deflating market hype, but then nobody riding on a bubble ever wanted it to pop.) These will be all too familiar to those who have lived through other tech sector bubbles and their aftermath, but then some tech investors have selectively short memories.

I don't have any doubts about the transformative potential of technology, I just hesitate to equate it with the feverish scramble of venture investment, which has everything to do with finance and nothing to do with technology.

Venture capital, traditionally a low-end small-scale business, has been distorted for too long by giant capital pools like SoftBank with far more vague capital management strictures than typical venture capital funds, looking to buy up entire sectors or new business areas. Significantly, SoftBank head Masayoshi Son told his executives in March to slow down investment amid the rout in tech asset valuations.

By all means, institutional investors should allocate relatively small amounts to venture on the chance of catching the next unicorn. But the days of big pops are over for the foreseeable future.