Yes, there are bright spots.
Yes, 2021 was by all accounts a batsh*t year of massive volumes and massive valuations, so comparisons to that year will necessarily look bleak.
But still…
- VC funding globally almost halved in the first six months of 2023 to $174 billion. And that’s despite $40 billion pouring into AI startups over the period.
- VC exits cratered in 2022 to $71 billion, down a stunning 91% from $753 billion a year earlier, returning to 2013 levels not seen since 2013, back when Flappy Birds and cronuts were a thing.
- And 2023 had a rough start even compared to very weak numbers in 2022, which ended with deal count declining in two consecutive quarters for just the second time in the past seven years.
- In 2021, “crossover investors” – hedge funds, mutual funds, PE funds and other non-traditional VC investors – had piled into VC at the highest level ever, participating in 5,229 deals with a collective value of $255 billion. But by the end of 2022, they were heading for the exits. (Some observers drily termed this “problematic” given that 80% of VC deal value included participation from these non-traditional investors.)
Some think all that VC dry powder will drive a surge of new investment and increasing valuations. Dry powder is indeed piling up, with funds sitting on a $290 billion powder keg. In fact, VC is the only asset class where uninvested capital is up.
Private equity? Down. Real estate? Down. Hard assets? Down.
Will all that dry powder change the picture? Don’t count on it.
The denominator effect means that many institutional LPs are overextended on VC and may be counseling their GPs to go slow on capital calls.
Our take: VC is having a terrible, horrible, no good, very bad moment. And that’s good.
Let’s zoom out. VC has become wildly frothy, with VC up fourfold over the last decade. In 2021, the number of unicorns nearly tripled year over year to almost 600.
For 2022, it dropped to around 275.
That number in 2016? 50.
In 2022, the value of U.S. VC investment was $345 billion.
That number in 2017? $90 billion.
We don’t believe the correction has run its course yet. But advising institutional LPs is what we do. And we counsel our clients that for investors committed to the asset class, this is very positive news.
We believe it will drive a return to sane valuations and attractive upside even as risk-free returns rise in a high interest rate environment. And for investors willing to stay the course despite some stomach-churning valuation declines, we believe opportunities in VC will steadily improve as the crossover investors (okay, let’s call them “tourist capital”) head for the exits.
For LPs who no longer see a fit in the asset class, we can certainly execute secondary sales. But our counsel for the rest: stick around.
We’re returning to sanity.
And that’s great.
