In the Face of Soaring Interest Rates, Venture Capital Retreats

Startup Funding Drying Up

In the low-interest rate environment of the last several years, startups routinely got support from venture capital firms. Pandemic-relief initiatives made capital relatively cheap and led to even more fundraising deals. Over the past decade startups snagged about $1.3 trillion from investors.

In today’s environment of rising interest rates, access to capital is drying up and the funding hurdles are higher. In some cases startups have laid off employees, scaled back their ambitions, and shelved plans to go public. A number of market observers contend venture capital has reached the end of a cycle.

High Valuation Multiples

Some say the flood of money into startups over the past 10 years created a less than healthy environment, as investor’s arguably pressured companies to grow too quickly. Valuation multiples for some venture-funded software startups were 100 times annual recurring revenue — 10 times higher than what’s been observed in the past. Now, many of those same investors are seeing losses. The Tiger Global hedge fund, a leading startup investor, posted a 45% loss in its main fund this year.

Survival of the Fittest

In the first three months of 2022, there was a 26% drop in venture capital investments relative to Q4 2021. As startups see the availability of capital shrink, they are facing additional headwinds of rising costs. In an attempt to reduce spending and delay the need for a new influx of capital, firms are scaling back, with more than 8,200 employees at venture-backed startups laid off since March.

Some market participants remain optimistic, pointing to past spending cuts that were followed by a rebound. Pure venture capitalists may welcome seeing less competition from hedge funds. Some take a somewhat evolutionary view, in that current market dynamics can promote healthy outcomes — if only the fittest survive.

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