TLDR:
– The glory days of venture capital (VC) are coming to an end, as ultralow interest rates and easy money have inflated startup valuations and fueled market liquidity.
– The VC party is now over, and the industry is heading for a bust that could last through 2024 and beyond. Startups will face a bleak future as funds dry up and the IPO market dries up.
It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians,” an excitable Stuart Butterfield, CEO of Slack, told Farhad Manjoo in The New York Times in 2015. This was no exaggeration. While interest rates remained close to zero, venture capital funds raised more money than ever and exited their investments at some of the highest valuations ever witnessed. The glory days of VC are over, and if history is any guide, the tech bust should last through 2024 and beyond.
Ultralow interest rates benefited venture capital in a number of ways. Low yields on conventional investments lured investors to Silicon Valley, which promised outsized returns. Between 2016 and 2021, US venture capital investment tripled. Ultralow rates compress the dimension of time, making the future appear closer than it is. It’s not surprising, therefore, that a large number of wildly extravagant startups got financed—luxury space travel, flying taxis, autonomous vehicles, and so forth. Due diligence took a back seat.
The valuations of startups, whose profits lay in the distant future, were vastly inflated by easy money. After battery developer QuantumScape merged with a SPAC in 2020, its market cap exceeded General Motors’—even though the company expected no sales for many years. Easy money also fueled market liquidity, helping venture capitalists exit their investments. Never before were so many unprofitable companies floated at such high valuations. In 2021, more than a thousand IPOs came to the US markets, more than double the previous record.
The VC party started to decline when interest rates began to rise in 2022. QuantumScape’s stock plummeted, and many startups faced a bleak future. WeWork, once valued at close to $50 billion, is one of the casualties. The Nasdaq index of technology stocks rebounded, but a bear market in tech stocks is likely to return in 2024. Startups will continue to go bust, and venture capital funds will post negative returns.
