If you look at the numbers, it’s not really clear.
Over the past decade, VCs have gotten used to average returns worth about 16% of their fund’s net asset value, according to private market data provider Pitchbook. This year, it was 5%, which means you could have quadrupled your money by buying plain old stocks.
Take that investment classic, the S&P 500; it’s up more than 22% this year. And the tech-heavy Nasdaq returned even more at nearly 24%.
Why should I care?
Since central banks began raising borrowing costs after the pandemic, liquidity has dried up. That’s made it harder to exit investments.
But those measly returns, high costs, and the ever-present big risks mean VCs may struggle with fundraising for a good few years yet – even in the US. For those from emerging markets like Southeast Asia and the Middle East, the lack of a proven track record of returns might make life even harder.
We’re basically in a cycle of poor liquidity -> fewer IPOs/exits -> less money returned to investors -> repeat. That’s not good news for startups on the hunt for cash.
“The direct impact is that cash in hand that I have is obviously less,” says Ekta Tolani, the chief investment officer at KbW Ventures, a VC firm backed by Saudi Arabia’s Khaled bin Alwaleed bin Talal. “When it comes to new investments or the opportunities right now, the only choice for me is to be conservative.”
The bigger picture
One of the differences between investing in stocks and investing in a startup is that stocks are part of a massive and regulated public market, so you get a lot more transparency and liquidity. VCs operate in private markets, where getting the information you need to find and assess an investment is hard.
That means that even when rates fall again and lending picks up, there’ll be a lag when it comes to cashing out of startup investments. “The current environment has extended the timeline to realize returns,” says Ivan Ong, General Partner, AFG Partners, a fintech-focused VC.
So what’s my play?
- Remember, venture investing is cyclical. What goes down must come up, but unlike public markets, you may have to wait longer. (Patience you must have, my young padawan 😉)
- Lower startup valuations are good. This is a good time to get, well, good deals. Cybersecurity and healthcare are among the sectors investors are eyeing for opportunities.
- Fewer macro uncertainties can be key. The drama over whether the US Fed will start cutting interest rates is more or less behind us. (The answer is a cautious yes.) Come November, the US will have picked a new president. And there’s a growing backlog of pre-IPO companies waiting to test public markets in 2025. These include the Chinese e-commerce giant Shein, Databricks and Klarna.)
So this may be a $h#t year for venturers. But there’s always next.
