I am currently being asked to what extent the current difficult situation on the public markets, triggered by high inflation, rising interest rates and the Ukraine crisis, is having an impact on the investment and fundraising activities of VCs.
In the last three months, I have intensively observed the market and talked to many participants such as investors – private as well as institutional – and founders in Switzerland and abroad. In this respect, the following trends have emerged.
1. Crossover funds are currently withdrawing from VC rounds with the consequence that valuations are falling rapidly
What is striking is that crossover funds, i.e. hedge funds that make public and private investments usually in the same vehicle, are noticeably withdrawing from VC. As a consequence, valuations for scale-ups are falling sharply as they are aligned with public market valuations. As crossover investors heal their wounds in the public market, the market could open up for venture capitalists to lead investment in startups, albeit at lower valuations.
As certain hedge funds are now investing more in early stage startups instead (such as Tiger Global), valuations in the early stage space are falling much less significantly.
2. The investment activity of VCs continues
We can often read that VCs are investing significantly less due to the current situation. This may be the case across the board, but there are also clear signs that this will be not true in the coming months. Andreessen Horowitz, for example, invested about 30% more in the period from January to May 2022 than in the same period in 2021, and Sequoia was also more active in the same period. I am convinced that investment activity will continue.
One of the reasons is that dozens of GPs have recently raised billions of dollars in funds that now need to be invested.
3. Wealthy investors go into private markets to escape stock volatility
Many VCs assume that fundraising will become more difficult. That may be true, but in my opinion, it is possible to have a different perspective. It is understandable that institutional investors such as pension funds are currently tending to withdraw from illiquid investments because they are overweighted in alternative investments due to the correction on the public markets. However, this is clearly not the case for high-net-worth individuals. Individual investors are increasing their bets on venture capital vehicles, hoping that these funds’ long-term horizon will offer a shelter from volatile public stock and fixed-income markets. GPs say inflows of money from wealthy individual investors have increased this year, and asset managers expect the trend to continue as higher interest rates and inflation weigh on publicly traded assets.
Having said that, an asset class with a longer-term investment horizon – like VC – becomes an attractive proposition in a downturn.
4. Buy the dip
Regardless of whether a downturn is long-lasting or not, strong startups will emerge. Companies like Airbnb and Dropbox have all grown up in downturns. Hence, this is statistically the perfect entry point to invest in venture capital. With the right timing Serpentine Ventures will soon launch the second vintage of the Lifecycle Funds e.g. the already established Growth Fund.
