‘It is perhaps the best time for any kind of business in any industry to raise money for the entire history, such as since the time of the ancient Egyptians,’ “Slack CEO Stuart Butterfield told Farhad Manjoo The New York Times In 2015.
It was no exaggeration. While interest rates remained close to zero, venture capital funds raised more money than ever and left their investments at some of the highest valuations ever seen.
The glory days of BC are over, and if history is any guide, the technical bust must last until 2024 and beyond. In other words, the venture capital brush has just begun.
Ultralow interest rates favored venture capital in different ways. Low returns on conventional investments have attracted investors to Silicon Valley, which promised huge returns. Between 2016 and 2021, the US venture capital investment tripled. Ultralow figures come together the dimension of time, which makes the future look closer than it is. So it is not surprising that a large number of very excessive startups are financed – luxurious space travel, flying taxis, autonomous vehicles, and so on. The necessary caution has deteriorated. Sam Bankman-Fried’s failed crypto exchange, FTX, has attracted a grid of blue-chip investors, led by the Luminary Sequoia capital of Silicon Valley.
The valuations of startups, the profits of which lie in the distant future, are much blown up by easy money. After battery developer Quantumscape merged with a spac in 2020, the market cap general cars exceeded – even though the company did not expect sales for many years. Easy money has also fueled the liquidity of the market, which helps venture capitalists to leave their investments. Never before has so many unprofitable businesses driven against such high valuations. In 2021, more than a thousand IPOs came to the US markets, more than double the previous record.
The punch bowl was removed from the VC party after the Fed began to raise interest rates in 2022. The stock of Quantumscape is down more than 90 percent – but at least, unlike many other businesses, it is still in the business world. Bankman-Fried is in jail waiting for trial. The IPO market has dried up. New entrants in the VC world ran for the hills. Others are facing large capital calls from VC funds that they have been committed during good times. There are many startups hungry for fresh funds, and it is a gloomy future. Wework, which largely describes himself as an ‘Office Solutions Company’ (sounds better than ‘rent’) and once had a valuation of nearly $ 50 billion, is the latest to hit the skids.
The Nasdaq index of technology stocks dropped strongly in the first half of 2023. There is great excitement about artificial intelligence – Nvidia, whose graphic processing units are used for AI, is valued at more than a billion dollar. However, large speculative bubbles take years to relax. Bear Market backlashes, also known as ‘sucker’s rallies’, are commonplace. After the Dotcom breast image, it took the Nasdaq a year and a half to trough (and over 15 years to regain its peak). The IPO market has acted little for years.
The Bear Market in Tech shares is likely to return in 2024, with the Nasdaq index hit a new perennial low. More businesses will be bust, and venture capital funds will continue to deliver negative returns. As far as Nvidia is concerned, it is worth remembering what happened to Cisco Systems. During the Dotcom bubble, Cisco, whose servers powered the Internet, was briefly the most valuable business in the world. The stock traded almost 40 times sales before it crashed. More than two decades later, Cisco’s share price remains far below the bubble peak. Nvidia, which has been valued at about 35 times sales, can suffer a similar fate.