How the titans of tech investing are staying warm over the VC winter

VENTURE capitalists are not known for their humility. But the world’s biggest investors in innovation have been striking a more humble tone of late. In a recent letter to investors Tiger Global, a hedge fund turned venture-capital (VC) investor, reportedly admitted that it had “underestimated” inflation and “overestimated” the boost the pandemic would give to the tech startups in its portfolio. In November Sequoia, a Silicon Valley VC blue blood, apologised to investors in its funds after the spectacular blow-up of FTX, a now defunct crypto-trading platform that it had backed. Speaking in January, Jeffrey Pichet Jaensubhakij, the chief investment officer of GIC, one of Singapore’s sovereign-wealth funds, said that he was “thinking much more soberly” about startup investing.

The VC giants’ newfound contrition comes on the back of a gigantic tech crash. The tech-heavy Nasdaq index fell by a third in 2022, making it one of the worst years on record and drawing comparisons with the dotcom bust of 2000-01. According to the Silicon Valley Bank, a tech-focused lender, between the fourth quarters of 2021 and 2022, the average value of recently listed tech stocks in America dropped by 63 per cent. And the plunging public valuations dragged down private ones. The value of older, larger private firms (“late-stage” in the lingo) fell by 56 per cent, after funds marked down their assets or the firms raised new capital at lower valuations.

This has, predictably, had a chilling effect on the business of investing in startups. Soaring inflation and rising interest rates made companies whose promised profits lie primarily in the distant future look less attractive today. Scandals like FTX did not help. After a decade-long bull run, the amount of money flowing into startups globally declined by a third in 2022, calculates CB Insights, a data provider. In the final three months of 2022 it fell to US$66 billion, two-thirds lower than a year earlier; the number of mega-rounds, in which startups raise more than US$100 million, fell by 71 per cent. Unicorns, the supposedly uncommon private firms valued at more than US$1 billion, became rarer again: the number of new ones contracted by 86 per cent.