Venture capital investment fell sharply in the third quarter of 2023, with global deal value down 30% year-on-year to $73 billion, according to market researcher, PitchBook.
This is the lowest level of quarterly VC investment since the second quarter of 2020 when the COVID-19 pandemic first hit.
The decline in VC investment is being driven by several factors, including rising interest rates, inflation, and the ongoing war in Ukraine.
These factors are making investors more cautious about investing in risky assets like startups.
According to a report from the Financial Times, Venture capitalists have dramatically scaled back activity this year, investing just $73 billion in the third quarter across the world. That is down from $106 billion during the same period last year, according to market researcher PitchBook.
At the same time, the number of venture-backed start-ups that sell to private equity groups has grown to 24% of total exits over the past couple of years, tripling the proportion of such deals from 2006 to 2010, according to data from the European tech corporate finance advisory Clipperton.
However, even as pressure mounts on start-ups to sell, deals are stalling as VCs squabble over whether to cash out, according to Scott Driggs, who covers private equity at Jefferies.
“Once the door closes and you crystallize those losses there’s no going back,” he said Driggs.
The expectation of investors: Investors expect that the demand for such buyouts will rise as the slowdown persists and more companies face a potential cash crunch.
- “In 2024 we will see a lot more demand for our capital because, on the one hand, entrepreneurs are going to be faced with an option; Should I sell this company for scrap, or should I shut down?” Resurge’s Malinger said. “Or can we provide an alternative option for this company?”
The report said that in the years running up to 2022, VCs took minority stakes in new businesses with growth potential even if they lacked a quick path to profitability.
Steep rises in interest rates over the past year have changed that, hammering private valuations, forcing VCs to pull back, and leaving a swath of start-ups at risk of collapse.
Acquisition
New investment groups are raising tens of millions of dollars in funding to acquire majority ownership and operational control of start-ups to turn the businesses around.
While still in an early phase, the trend is a further sign of the difficulty many companies face as traditional venture investment chills.
In one example, investors Oren Peleg and Eyal Malinger started UK-based Resurge Growth Partners this year to raise €120 million to buy start-ups.
The veteran investors, who have previously worked at companies including Howard Marks’s Oaktree Capital Management and VC firm Beringea, say they have spotted a gap in the market and plan to make average investments ranging from €10 million to €30 million.
Resurge Growth will acquire start-ups to provide a turnaround, either because a previous valuation was too high and did not reflect the new market reality, or because operational changes are required.
- “There’s a real opportunity here to play a very important role, which is to help companies transition from venture ownership to private equity ownership,” Peleg said. “No one is willing to send the hard message of saying this needs a reset, and that will be the role that we play.”
Other investors, such as Matthew Bradley, are also leaving venture capital to pursue start-up takeovers. Bradley, formerly chief investment officer at London-listed VC firm Forward Partners, launched Tiktok Capital last year to buy up start-ups.
Another firm, San Francisco-based Arising Ventures, has been looking to buy up start-ups with viable business models but slowing growth since its founding in 2020. Chief executive Kjerstin Erickson said that in the past year, the number of potential deals has grown fivefold.
Opportunities came up when “the company has raised more money than they are worth in the market”, she said. “We’ll do the deal if we think there’s a real business underneath.”
This year the group which is structured as a holding company rather than a fund took out a billboard in the heart of San Francisco with the slogan: “We invest in second chances.”
