- The VC glory days fueled by easy money appear over as tech busts.
- Soaring startup valuations are now struggling as rates hiked and investments fled.
- Historical data suggests that unwinding can persist for years.
The era of easy money and soaring startup valuations that fueled the venture capital industry’s meteoric rise over the past decade appears to be decisively over. As the Federal Reserve hiked interest rates in 2022, investment flooded out of high-risk tech ventures, leaving many overvalued firms struggling.
Low capital costs in the past
Ultralow rates in prior years led yield-hungry investors to pour unprecedented funding into Silicon Valley players chasing outsized returns. Between 2016 and 2021, VC investment in U.S. startups tripled to over $330 billion.
Low capital costs enabled backers to minimize due diligence while heavily discounting future profit potential. However, since peaking last year, exits via IPOs and acquisitions have screeched over 60% lower.
Facing a “funding crunch”
The punch bowl is gone, and the party seems decidedly finished. Numerous startups face a funding crunch, including high-profile casualties like FTX and WeWork.
The tech-centric Nasdaq index did rebound briefly to start 2023 amid hype around AI advances. But many expect another leg down as speculative excess continues unwinding.
Historical data suggests the unwinding of bubble-level mania can persist for years. For example, after the early 2000s dot-com crash, the IPO market and Nasdaq valuations remained depressed for over a decade. Industry observers believe the VC downturn has only just begun.
