Dry Funding in US VC Market... Lowest in 9 Years

[Asia Economy Reporter Yujin Cho] Due to the impact of high-intensity tightening, the flow of funds is drying up even in the US venture capital (VC) industry. As Silicon Valley VCs, centered on tech stocks, reduce new investments, the amount of funding raised by tech startups has fallen to its lowest level in nine years. The main cause of the market contraction is analyzed to be the increased uncertainty of investment returns due to interest rate hikes and deepening recession concerns.

According to financial investment information firm Preqin on the 20th (local time), the amount of new funds raised by US VCs in the fourth quarter of last year was $20.6 billion (about 26.7 trillion KRW). This is a 65% decrease compared to the same period last year and is the lowest level since 2013 for the fourth quarter. The number of funds managed by VCs also shrank to 226, about one-third of the peak in the fourth quarter of 2021 (620 funds).

This market contraction was caused by the sharp decline in tech stocks represented by Amazon, Apple, Microsoft (MS), and Nvidia last year, which dealt a blow to the VC market. As high-intensity interest rate hikes overlapped with recession concerns last year, pessimism spread and tech stock prices repeatedly fell. As a result, Apple’s stock price, the leading stock, plunged 15% over the past year, and Nvidia, a representative US semiconductor stock, almost halved (47%). The Nasdaq index, centered on tech stocks, fell more than 36% from its peak of 16,057.44 in November 2021 to the end of last year.

With the outlook for a deepening recession this year and the expectation that the interest rate hike trend will continue, it is not easy to break last year’s trend and achieve a rebound. The Wall Street Journal (WSJ) reported, "Due to last year’s tech stock crash and stock market sluggishness, the value of tech companies plummeted, causing VCs focused on tech stocks to slow down their investment pace."

[Image source=Reuters Yonhap News]

As market enthusiasm cools, funding targets for this year are also being lowered. Andreessen Horowitz, a famous Silicon Valley VC, announced plans to slow down the fundraising pace for a $4.5 billion virtual asset investment fund compared to the original target. Tiger Global Management, a major investor in Chinese big tech, recently lowered its new venture fund target from $6 billion to $5 billion. This is less than half of the target amount ($12.7 billion) in 2021.

They are focusing more on reinvestment and management of companies they have already invested in rather than new investments to reduce risk. Miguel Ruina, Managing Director at Hamilton Lane, said, "Investors have become more cautious about new investments in tech companies."

The outlook for this year is also not bright. According to a survey conducted by S&P Global from December last year to the 15th of last month targeting a total of 511 VC and private equity fund (PEF) executives, 35% of VC executives expected the fundraising environment to worsen compared to last year. Investment sentiment toward tech stocks is also deteriorating. 58% of respondents said they have "no interest at all" in investments related to virtual asset exchanges and related companies that have swept the VC market in recent years. S&P Global reported, "VCs are identifying renewable energy and medical technology as promising sectors instead of tech stocks."