Recently, there has been talk of a slowdown in venture capital investment, with TechCrunch looking at it from many perspectives, including the fintech industry, a PitchBook analysis, and even earlier on how businesses should prepare if this happens. However, given that our inboxes are flooded with news about freshly obtained venture funds, if a slowdown occurs, it may occur gradually. We noted just two weeks ago that companies are sitting on a lot of cash and continuing to increase it.
Leading Edge Capital, for example, raised over $2 billion for its sixth fund, Base10 Partners raised $460 million for its third fund, Founders Fund raised $5 billion for two funds, Freestyle raised $130 million for its sixth fund, and so on. Furthermore, Voyager Ventures announced the creation of its first fund, which would invest $100 million in climate-tech firms in North America and Europe. We asked Sapphire Ventures partner Beezer Clarkson and Harvard Business School Jacob H. Schiff Professor of Investment Banking Josh Lerner for their thoughts on what we’re seeing, and while they’re still trying to make sense of it all, they did notice a couple of things that could impact the deal-making velocity we’ve been seeing.
Lerner cited rising interest rates as an example, stating that a “high-rate environment may lead to a move to bonds” for some pensions. “High interest rates may also raise the need for venture capital when bank funding is less appealing to businesses,” he noted. Indeed, in some of his early research, he discovered that interest rates have little consistent impacts.
Meanwhile, Clarkson indicated that whatever goes up must eventually come down, while she admitted that the picture is still “cloudy.” “As they react to the market, venture groups have routinely come back to market faster than expected — faster raising, bigger check sizes, and swift follow-on rounds,” Clarkson added. “Not only are these companies returning to the market sooner, but they are also raising larger sums of money or using other vehicles, such as opportunity funds.” (It’s worth noting that this year’s opportunity funds were funded by Khosla Ventures, SoftBank, and Better Tomorrow Ventures.)
“2021 hit a new high,” Clarkson said in a series of tweets last month highlighting the trend to quicker spending. In a fund’s first full calendar year, we observed an average of 32 percent of capital called. If a fund sets aside 50% of its assets for follow-on capital, the first investment term would be less than two years. That’s a first.” Keep an eye on the pace throughout the remainder of 2022, according to Lerner and Clarkson.
“When public technology stock prices plummeted drastically and there was little obvious impact on venture capital fundraising,” Lerner said, this moment seems like the period between March and December 2000. It’s anyone’s guess if we’ll experience a similar big correction in the next several years as we did in 2001-2003.” “I can see investors slowing down their pace if we have a lengthy decline,” Beezer added. Even if investors have cash on hand, they may need to concentrate on the portfolio because certain firms may require more help for fund raisings than in the past.”
