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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is founder of Sifted, an FT-backed site about European start-ups
In these grim times, the world could do with a shot of hope. Right on cue, up pops the irrepressible venture capitalist Marc Andreessen to shout about his latest techno-optimist manifesto. “Give us a real world problem, and we can invent technology that will solve it,” the co-founder of Andreessen Horowitz wrote this week.
No matter the billions of dollars wasted on fruitless crypto and metaverse investments, nor the recent landslide in private market valuations, nor the still-chilly state of the public listings markets; the techno-capitalist machine that is Silicon Valley continues to hum with the conviction that it can build a better future. To the outside observer, it appears like “ideology as usual” in VC land.
Yet when the volume is turned down, many VCs have been quietly rethinking their financial game, recognising that the uniquely favourable conditions that benefited their industry over the past two decades are never going to occur again. Last year, some commentators even speculated about whether the industry had reached a “Minsky moment”, when asset values suddenly collapsed after a period of reckless speculation. (There has been nothing quite that dramatic so far.)
This year, others have questioned whether we might be nearing the end of the VC-driven entrepreneurial age. For an industry built on short-sighted enthusiasm and wild-eyed ambition, there is a lot of doubt around as many VC funds struggle to raise capital. The storytellers need a new story.
The VC industry certainly experienced a golden era over the first two decades of this century. The near-universal adoption of the internet and smartphones created the digital infrastructure for VC-backed ecommerce and social media companies to boom. With massive network effects and negligible marginal costs, consumer internet companies were catnip to VC investors, enabling them to turn relatively small early-stage investments into mega-sized exits.
Moreover, the extraordinarily loose monetary conditions after the global financial crisis of 2008 let VCs raise cheap money and hurl it at fast-scaling companies, such as Uber and Airbnb.
This capital-as-a-strategy model, prioritising revenue growth over cash or profit generation, is a lot harder to make work now that money costs something. When Brian Chesky, Airbnb’s co-founder, visited the FT recently, he acknowledged that his company would never have been able to follow its growth strategy of the 2010s today.
The permissive regulatory environment in the US has tightened, too. No longer will it enable start-ups and VCs to cash out to voracious tech companies, indirectly recycling money into new investments. According to a 2021 report from CB Insights, the big tech companies completed more than 800 acquisitions over the previous 30 years. But Washington’s tougher antitrust regime has barred the exit to many such trade sales while the public market listing route remains potholed.
Given this bleaker outlook, many of the so-called “tourist” investors who flooded into late-stage private markets in the late 2010s, have gone back home. As Sam Lessin, a partner at Slow Ventures, wrote this week in a “techno-realist” manifesto in The Information, the VC factory line churning out standardised software unicorns (start-ups valued at more than $1bn) has shut down.
VC is returning to its origins as an artisanal cottage industry after failing to become an institutional asset class. That suits some VC firms just fine. “Our job is to find entrepreneurs who were placed on the planet to build industries,” says Danny Rimer, partner at Index Ventures, describing VC as a “passion industry”. He adds: “We think it is a great time to invest. We love to be contrarian.”
Other firms are trying to write a new playbook. For example, General Catalyst, the US late-stage fund, is merging with La Famiglia, a German early-stage fund, combining international expertise with local knowledge.
The VC industry has been stuck on one very specific formula of funding enterprise software companies and will have to find more innovative ways of backing climate tech and industrial hardware companies, suggests Judith Dada, a partner at La Famiglia. “The venture ecosystem will evolve. Tomorrow’s successes are not going to look like yesterday’s,” she says.
Just as at the top of any bull market it is dangerous to believe “this time is different”, so at the bottom of any bear market, too. But, above all, VC investors are praying for interest rates to come down, the market cycle to turn and animal spirits to revive.
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