Venture Firms Double, Then Halve, In Stunning Reversal (indiadispatch.com) 34
An anonymous reader shares a report: According to data analyzed by Morgan Stanley and Pitchbook, the number of active venture capital firms worldwide surged from 2014 levels, more than doubling by 2021, before sharply contracting to below 2014 figures in a stunning reversal.
Golden times! (Score:4, Interesting)
Particularity the pandemic (notice the 2021 mention). The amount of failed businesses due to restrictions that were purchased for little money by investors was colossal. All my friends in investment were ecstatic...
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WTF Is "Dry Powder"? (Score:1)
Re:WTF Is "Dry Powder"? (Score:4, Informative)
Cash on hand or other highly liquid assets available for whatever purpose such as buying companies or paying off other obligations.
Tl;dr: available cash on hand.
Re:WTF Is "Dry Powder"? (Score:5, Interesting)
What it really is is the amount of commitments that a venture fund has from LPs. VCs don't actually hold that cash, when they're ready to make investments they do a cash call, where the LPs are required to transfer funds to the VC who then deploys it. This is done for a few reasons, namely that the VC isn't sitting there collecting management fees on an undeployed mountain of capital, they collect fees only when the capital has been deployed and starts working.
The reason I make this distinction is when talking to several of my VC associates of mine, many have passed on investments because they are concerned the LPs won't meet the cash call, even though they are required to via their commitments. This is where interest rates come into play. Let's say an LP is a family office worth $100M, and they committed $2M to the VC. They still keep and invest their money, but are required to transfer funds when called. From the LPs perspective, having that money sit in cash waiting for a cash call is stupid, so they take out loans against their assets, usually in the form of margin. When interest rates were low this was the smart thing; you could get 3-5% margin rates against assets that were going up (like Bitcoin, but also just stocks in general), or maybe some stable income assets to manage your volatility like AA bonds or muni bonds or treasuries; you take out the margin loan and transfer the cash to the VC, and if you run into trouble on the margin loan you sell the assets and cover the margin call. But the last 10-12 years, you could easily make the payments on the margin loan.
Lately with interest rates going up the margin rates are much higher; Fidelity is advertising 9.25% for over $1M in margin rates [fidelity.com]. On top of that high growth asset classes like crypto have been highly volatile; if you took out a margin loan but your crypto assets dropped a lot, covering a margin call gets really hard. If you had plenty of treasuries or bonds 4 to 5 years ago, those went down in value a lot because with higher interest rates older bonds have less value relative to newer bonds. Thus liquidity is a lot harder for the LPs.
Those dry powder figures come from filings that state this is a new fund of $xxxM of dollars, but the VC doesn't have that cash. And when LPs are reluctant to live up to their commitments due to their own liquidity constraints, the worst thing a VC can do is make a cash call and the LPs refuse; even if they are contractually obligated what are you going to do, sue your LPs? Your fund would collapse overnight, no LP will ever give you funds again. For many VCs, they will tell you that they'd rather be wrong not making an investment than be wrong with an investment they made, and their customer is the LP, so the hard choice for a VC is to appear that they have funds (dry powder) and seem like a healthy fund but not invest and risk their fund collapsing completely.
There are also many VCs out there that have yet to close a fund either, so they are telling startups they are investing but they don't actually have any money or even a fund closed. I've known startups who got a term sheet and everything seemed good, but the VC dragged it out and the startup floundered, having to do a layoff to preserve capital because the VC didn't have a fund; they were using the "investment opportunity" to try and get the LPs to sign up to the fund and close; it set the wrong expectation on the founder who scrambled. I've known another startup founder who was asked to pitch directly to the VCs LPs to try and get them to close the LPs for the VC who could then turn around and give him money.
These are anecdotal stories but I think they're more common than it appears. Which makes me question even this data. I believe the so-called dry powder is a lot less than that, and I believe the number of active VCs when compared to the number of venture firms listed here is about half or less than what is proposed here, and the rest are zombie VCs.
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Excellent post.
> I believe the so-called dry powder is a lot less than that, and I believe the number of active VCs when compared to the number of venture firms listed here is about half or less than what is proposed here, and the rest are zombie VCs.
This is probably true but we can't really know what's going on because the original chart being referenced has no explanation of anything. All we know is this, which isn't much, "According to data analyzed by Morgan Stanley and Pitchbook". And even then I
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Vulture Capital (Score:5, Informative)
Venture capital is dead. Vulture capital is the new trend..
Re:Vulture Capital (Score:4, Interesting)
Buying failed businesses should not be profitable. Fix that and the problem goes away. Leveraged Buyouts need to have strings attached to all the capital in the business.
Previous Contractions (Score:3)
Previous contractions like the 2000 DotCom boom/bust and the 2008 global financial crisis hardly look like a blip on that graph, which really shows how ridiculously over-inflated everything has been for the last 10 years.
Ahh, THAT Morgan Stanley (Score:2)
The same chuckledinks that pretty much committed suicide on garbage investments in garbage stocks due to their greedy little fingers trying to cash in on other people's greed....
Definitely one of the go-to sources of valuable info for finance!
Demographics (Score:2)
This is just another expression of "enough boomers have retired can no longer take the volatility. So they are rapidly moving money from high yield high risk venture capital firms to low yield but stable bonds and T-bills"
And like most things that Boomers did in the past, when enough of them do something, everyone else in the same age cohorts copies the actions. That charts tells us that critical mass has been reached.
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Collapse in funding is not total, so this is definitionally not totalized.
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Relatively, not totally speaking, aren't boomers the ones who own stocks?
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No, everyone owns stocks. Boomers however are the largest population segment right now, and they're also at their most capital rich stage of just before/just after retirement.
Which logically means that they're the ones who own most stocks vis a vis other generations, AND that they're most of the people who are moving their outsized capital from riskier forms investments to safer forms investments.
here comes the new boss (Score:5, Insightful)
This is kind of a no shit Sherlock (Score:3, Insightful)
It's a pointless and cruel way to control inflation and it's not going to work because our current inflation is caused by monopolies price gouging. But for some damn fool reason every single American is absolutely convinced they're not going to be the one to lose their job or take a pay cut and so nobody really opposes it.
It's like the old saying, recession is one year neighbor loses their job and a depression is when you lose your job. We're a nation of psychopaths. Or at least every man for himself. Which is a terrible way to live
Re: This is kind of a no shit Sherlock (Score:3)
It's not really about cutting jobs. It's about cutting spending. The fact that people won't do that in the face of mounting data is what leads to us waiting so long that jobs have to be cut.
As a consumer, I stopped spending on non-essentials after the pandemic. It was clear we were in a consumer led inflationary spiral and everything was overpriced. Many instead lost their job then continued to spend savings and use credit. Those people are the problem.
That's objectively not true (Score:2, Informative)
And like I said, it's not working because inflation is caused by monopolies and price gouging, not Americans joining the middle class!
It's about layoffs. It was *always* about layoffs. They want you to lose your job, take a lower paying one and be forced into a lower standard of living.
They're balancing the books on your back. and it
Re: That's objectively not true (Score:2)
Because he knows the American people well enough to know they won't stop spending until they have to. It's not his fault. He looks at inflation and unemployment. If inflation went down, he'd cut rates. If unemployment goes up, he'd cut rates.
His job (aside from setting rates) is to prognosticate for the rest of us whats going to happen. And he's done a damned good job of it. You can't force morons (on Wall Street and Main) to listen.
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Consumer credit and commercial credit are two different things. You might cut back your spending on big ticket items if the financing costs go up. But not so much on short term debt. Most people don't even see that if they pay their CC bills off monthly. And my credit card rates remain largely unchanged over the past few years. Most CC companies hide a certain portion of their credit costs in merchant fees (because some of our SOB customers pay off the bills, so we make no money from them). Merchants just t
Re: This is kind of a no shit Sherlock (Score:2)
Credit has little to do with it beyond those people who have run out. The important signal that SHOULD get people to stop spending money is seeing costs go up. If you don't stop buying shit, you're feeding inflation.
Restaurants should have all gone out of business in the last year or so, for example. Door Dash should no longer be a thing. Smart consumers should have driven them out of business.
Simple (Score:2)
They ate each other.
Something ventured, nothing gained. (Score:2)