US venture capitalists hope a rising tide will dissuade them from admitting that some investments are stuck in the mud.
Valuations of public technology stocks are skyrocketing on excitement over generative artificial intelligence. But private markets have yet to recover. Startups are looking for money to avoid downside rounds. That leaves billions of dollars of potential investment on the sidelines.
The past decade has been very prosperous for VCs. Low interest rates pushed more money into early-stage risky investments. Last year set a new record for venture capital funds. According to PitchBook data, they raised nearly $163 billion. For example, Tiger Global closed a $12.7 billion fund. Global venture companies had nearly $586 billion in unallocated capital, the so-called “dry powder”, in October last year.
The technical downturn and the collapse of Silicon Valley Bank have made it more difficult for fund managers to invest or secure capital this year. Distributions to outside investors – known as “limited partners” – have fallen. Exits are scarcer.
PitchBook data shows that US VC firms raised less than $12 billion in 99 funds in the first quarter of the year. That is almost three-quarters less than last year.
In the aftermath of the dot-com crisis, a handful of US venture capital firms took the unusual step of shrinking the size of their funds. Groups such as Accel Partners have exempted investors from a number of capital commitments.
Restricted partners should not expect repeated occurrences. Management fees give VC funds too much of an incentive to put money to work. One option is to divert funds from out-of-favor crypto startups into the boom in AI.
Change is already underway. Paradigm has broadened the focus of its fund. Peter Thiel’s Founders Fund has reportedly reduced the size of its flagship fund. But it plans to put pledged money into a future fund, not release its claim.
The pain of crypto startups could eventually turn into a win for AI specialists. It doesn’t really come down to a bait and switch by VCs. “Ace, wait and refocus” might be a fairer description.