“It might be the best time for any kind of business in any industry to raise money for all of history, like the time of the ancient Egyptians,” Slack CEO Stuart Butterfield told Farhad Manjoo. The New York Times In 2015
This was not an 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 seen.
The VC heyday is over, and if history is any guide, the tech slump should continue into 2024 and beyond. In other words, the recession in venture capital has just begun.
Ultra-low interest rates have benefited venture capital in several ways. Low returns on conventional investments attracted investors to Silicon Valley, which promised large returns. Between 2016 and 2021, US venture capital investment tripled. Extremely low rates compress time and make the future seem closer than it really is. So, it’s no surprise that a lot of weird startups have been funded, including luxury space travel, flying taxis, autonomous vehicles, and more. Necessary checks took a back seat. Sam Bankman-Fried’s failed exchange FTX attracted a list of blue-chip investors led by Silicon Valley’s Sequoia Capital.
Valuations of startups whose profits were far off in the future were greatly inflated by easy money. After battery developer QuantumScape merged with a SPAC in 2020, its market value surpassed that of General Motors — even though the company didn’t expect a sale for years. Easy money also boosted market liquidity and helped venture capitalists exit their investments. Never before have so many unprofitable companies floated at such high valuations. In 2021, more than a thousand IPOs hit the US markets, more than double the previous record.
After the Fed starts raising interest rates in 2022, the punch bowl is removed from the VC party. QuantumScape’s stock is down more than 90 percent — but at least it’s still in business, unlike many other startups. Bankman-Farid is in jail and awaiting trial. The IPO market has dried up. Newcomers to the VC world have run for the hills. Others face large capitals from VC funds committed during good times. Many startups that are deprived of new funds are facing a dark future. WeWork, which describes itself as an “office solutions company” (sounds better than “rentals”) and was once valued at nearly $50 billion, is the latest company to succeed.
The Nasdaq technology stock index rebounded strongly in the first half of 2023. However, large speculative bubbles take years to pop. Bear market spikes, known as “sucking rallies,” are commonplace. After the dot-com crash, the Nasdaq took a year and a half (and more than 15 years to regain its peak). The IPO market saw little action for years.
A bear market in tech stocks is likely to return in 2024, with the Nasdaq falling to multi-year lows. More startups will fail and venture capital funds will continue to have negative returns. In the case of Nvidia, it is worth remembering what happened to Cisco systems. During the dot-com bubble, Cisco, whose servers powered the Internet, was briefly the world’s most valuable company. Its stock traded at roughly 40 times sales before the crash. More than two decades later, Cisco’s stock price remains well below its bubble peak. At a price of about 35 times sales, Nvidia could suffer a similar fate.
