Summary
- Fundraising for venture capital groups is declining, as limited partners pull back from the excesses of recent years.
- This is just another sign that the financial arena is shrinking after the richness of recent years.
- There appear to be no major dislocations at the present time, but given that the Federal Reserve is tightening and that limited partners are pulling back concern exists.
- Point: the times have changed, and we are on the other side of the recent Fed asset bubble.
- Investors beware.
Another financial sector seems to be backing off as the asset bubble created by the Federal Reserve continues to shrink.
The venture capital world only raised $20.6 billion in the fourth quarter of 2022.
According to the Wall Street Journal , this "was a 65 percent drop from the year-earlier quarter and the lowest fourth quarter amount since 2013...":
"The amount was also less than half the level raised in the preceding three months, the first time fundraising volumes decreased from the third to fourth quarter since 20009."
"Fund backers, known as limited partners, invested in 226 venture capital funds in the fourth quarter, the fewest for that time period since 2012..."
"By contrast, they backed 620 funds in the last three months of 2021, when technology stocks peaked."
Last year there occurred a slowdown in the startup sector of the business, although this was not consistent across all markets.
I work quite a lot in the angel finance space, and there was little slowdown in the past year, although, toward the end of the year, there was some feeling that things were showing down a bit.
The new year, 2023, feels much softer.
But, in terms of the venture world, "The strained environment has already pushed firms to cut back on their fundraising ambitions for the year."
Limited partners have also "become more careful backing funds run by less-experienced investors, who furnished the bull market thanks to large amounts of cash flowing into the startup market." (Thank you, Mr. Federal Reserve.)
"In 2022, limited partners backed 141 funds run by first-time managers, a 59 percent decline from the prior year and the lowest number since 2013."
I have been amazed at all the money that has been available over the last three years or so when there has been so much uncertainty in the air. I have never seen such a situation.
But, let's look at the longer-term picture.
Notice that through the 2015-2018 period, the trend of venture capital fundraising is up, although very seasonal throughout the year.
This was the time that the Federal Reserve was going through the Q1 and Q2 stages of quantitative easing to stimulate the economy.
In 2019, the fundraising fell off a bit but did not drop back much at all.
In 2020, the Federal Reserve introduced the Q3 part of the quantitative easing, this time in particular, to fight back against the problems created by the Covid-19 pandemic and the Covid-19 recession.
As you can see, venture capital fundraising took off!
This was the time of the Fed created asset bubble. Trying to err on the side of loose money, the Federal Reserve seems to have overdone the amount of funds it has pumped into the financial system.
The financial markets were totally loaded everywhere.
Moving On
The first quarter of 2022 was massive.
But, the second and third quarters were not that bad, from an historical perspective.
However, the Federal Reserve was moving into a period of quantitative tightening. This new policy stance began in the middle of March 2022. This policy program is just finishing up its third year.
The Fed has signaled that it will try and extend this period of quantitative tightening into much of 2023.
This quantitative tightening is having some impact on various segments of the financial markets, and this has already caused some pain to investors.
One area hit by the quantitative tightening has been the cryptocurrency space. The most well-known operation that has suffered from the slowdown has been the cryptocurrency market TFX, who declared bankruptcy in November.
More organizations have followed TFX to the dustbin.
Also, blank-check companies have also been hit by the Fed's move to a tighter monetary policy.
There are others.
The important part is that the Fed's actions are having effects and these effects are resulting in markets getting squeezed and investors getting hurt.
Now, I am not saying that the venture capital industry is experiencing or will experience bankruptcies, shutdowns, or other major dislocations.
It does provide us with a cautionary note.
Limited partners in the venture capital world are pulling back.
We are experiencing stock price declines and declines in valuations. Interest rates are expected to continue to rise. And, concern over investor experience is becoming a factor in where to invest.
Certainly, failures, bankruptcies and such can occur.
The crucial thing is that we are getting another signal from the market that "times have changed."
We are on the other side of the recent Federal Reserve bubble.
And, this is how the economy unwinds itself.
Keep your eyes open!!!
For further details see:
Another Sector Backing Off: Venture Capital