From VCC: 11/10/2023 Private Markets including VC funding, Pre IPO secondary's, primary financing rounds, and other private deals have ground to a halt. Overall volumes are down, number of deals are down, and the bid/ask spread has widened. Private markets are opaque and complex, however, the market dynamics here are really simple and we're going to draw it out in Crayons for readers who are not familiar with the privates space. Let's first look at a couple of charts, from accounting firm Ernst & Young:
New deals, however, don’t have the valuation overhang of the prior market and are attractive to investors. As we’ve said before – now is a good time to build a company. Early-stage activity has not been impacted as much as late-stage markets. Half of the VC deals in Q2 2023 were seed and Series A, raising $7.2 billion that represented a quarter of the VC investment. While VC fund formation increased in Q2 2023, it is nowhere near the levels we’ve seen recently. In some cases, existing funds haven’t fully invested previous funds or deployed any capital from recently raised funds. Also, there could be a bit of portfolio diversification, as limited partners look to other more conservative or higher-yield opportunities in the market given the recent heavy concentration in the VC space.
Looking back at these charts, we might say that the post 2020 COVID rebound of the 2021/22 ish boom might have been a snapback to the COVID doldrums. In any event, deals have slowed down to a trickle although this chart wouldn't show it. The fact is that many of the deals that are happening are follow on rounds, and/or in companies that are not impacted by the economy like SpaceX, that is shooting higher regardless of economic circumstances.
What's the catalyst
Private Markets resemble real estate markets, right now capital is expensive. Fed funds rates are higher than they have been in 20 + years, in some cases, even more. So the end result is there are no buyers/investors. To summarize, there are several factors negatively impacting private markets:
A) Investors lost money on market declines, and/or have their capital tied up in positions at higher valuations and they don't want to sell for the lower valuation
B) With the Fed having rates at high levels, investors can't borrow to buy houses, so their available cash gets used up and they don't have the cash to invest in Private Equity
What do investors want
Because of the overall cash crunch, investors are looking for income. Typically the most low hanging fruit for income investments is rental properties, but due to the fact that the real estate market is in a slump, and rates are high, it's not the best time to buy an income property (unless you can get it at a steep discount).
Investors are already sitting on Private Equity they invested in during the 2020 - 2022 boom, and until they sell that, probably won't be investing heavily in Private Markets. It's not a sentiment thing, it's a cash thing. Now that cash is hard to come by, if you are in a situation where you have cash to invest, you're either going to sit on it and collect the 5% + interest or get a bond paying 10% - or you're going to invest in a cash cow, an investment that produces income. You're definitely not going to be buying more startups.
That's the macro view, obviously some startups are still raising capital, and secondary transactions are still happening. Gab.com, the Free Speech platform, is wrapping up a Reg CF campaign where Gab raised around $800,000 (round is still open) at a 250m valuation. Quantum computing and networking startup Photonic raised a $100 million round that included an investment from Microsoft. [1 Crunchbase]
Deals are still happening. But they are 'sharpening their pencils' and more deals are failing. Having real estate and stock markets depressed is not helpful, due to the 'wealth effect' - some have observed that when the stock market is up, Crowdfunding investment is up too (because people feel like they have more to invest).
So what's the solution?
Be patient- things will turn around. In the meantime, invest small amounts in long shots, and work on achieving passive income, whether that means buying into an income producing activity, or doing more consulting work. Now is the time to fine tune your portfolio, your skills, and cut back. Cut the subscriptions you don't need, pay off your credit cards, and save your money gaining good interest meanwhile. Buying stocks is trickier now than in a bull market because you don't know when the bottom is going to come. For example, Tesla (TSLA) is a great company who is a Monopoly on EV infrastructure. But one earnings miss can shoot the stock much lower, and there's no telling when that might happen. It's volatile. If you want to buy something like TSLA, ease into it (or in trading they say 'legging in' which means buy 20% each week for 5 weeks, or some derivative of that). But stocks are not the thing now, income is. Buy dividend stocks, buy bonds, avoid Government paper there is no extra safety there. Many US corporates have better balance sheets than the government, and you're paying for that 'security' which is all an illusion.
Another reason that it's good to save now, as market conditions worsen there may be bargain opportunities to get assets pennies on the dollar, but we haven't seen that happen yet. When it does (and it looks likely) those who have the cash to buy at firesale prices will be greatly rewarded.
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Venture Capital Cross- VCC offers investments in disruptive paradigm shift technology projects, platforms, and people - visit vccross.com to learn more.
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[1] https://news.crunchbase.com/venture/quantum-startup-photonic-microsoft-azure-cloud/
