“It might be the best time for any kind of business in any industry to raise money in all of history, like the time of the ancient Egyptians,” an excitable Stuart Butterfield, CEO of Slack, told Farhad Manjoo in New York Times in 2015
That was no exaggeration. While interest rates remained close to zero, venture capital funds raised more money than ever before and exited their investments at some of the highest valuations ever seen.
The VC glory days are over, and if history is any guide, the tech crash should continue until 2024. and after that. In other words, the venture capital crash has only just begun.
Super interest rates benefited venture capital in a number of ways. Low returns on conventional investments attracted investors to Silicon Valley, which promised huge returns. Between 2016 and 2021 US venture capital investment has tripled. Super rates compress the time dimension, making the future seem closer than it is. It is therefore not surprising that a large number of extremely extravagant startups have been funded – luxury space travel, flying taxis, autonomous vehicles, etc. Due Diligence took a back seat. Sam Bankman-Fried’s failed crypto exchange, FTX, has attracted a slate of blue-chip investors led by Silicon Valley luminary Sequoia Capital.
Valuations of startups whose profits lie in the distant future have been greatly inflated by the easy money. After battery developer QuantumScape merged with SPAC in 2020, its market capitalization surpassed that of General Motors — even though the company didn’t expect sales for many years. Easy money also fueled market liquidity, helping venture capitalists exit their investments. Never before have so many unprofitable companies been offered at such high valuations. In 2021 more than a thousand IPOs hit the US markets, more than double the previous record.
The punch bowl was removed from the VC party after the Federal Reserve began raising interest rates in 2022. QuantumScape’s stock is down more than 90 percent, but at least, unlike many other startups, it’s still in business. Bankman-Fried is in jail awaiting trial. The IPO market has dried up. New entrants to the VC world have rushed for the hills. Others are facing big calls for capital from venture funds they committed to during good times. Lacking fresh funds, many startups face a bleak future. WeWork, which grandly describes itself as an “office solutions company” (sounds better than “rental”) and once had a valuation of nearly $50 billion, is the latest to flounder.
The Nasdaq technology stock index rebounded strongly in the first half of 2023. There is huge excitement around artificial intelligence – NVIDIA, whose GPUs are used for AI, is valued at more than a trillion dollars. However, large speculative bubbles take years to deflate. Bear market rebounds, also known as “shoot rallies,” are commonplace. After the dotcom crash, the Nasdaq took a year and a half to fall (and more than 15 years to regain its peak). The IPO market has not been very active in years.
The bear market in tech stocks is likely to return in 2024, with the Nasdaq hitting a new multi-year low. More startups will fail and venture capital funds will continue to post negative returns. As for Nvidia, it’s worth remembering what happened with Cisco Systems. During the dotcom bubble, Cisco, whose servers powered the Internet, was briefly the most valuable company in the world. Its shares were trading at nearly 40 times sales before collapsing. More than two decades later, Cisco’s stock price remains well below its bubble peak. Valued at about 35 times sales, Nvidia could suffer a similar fate.
