Venture Capitals new reality

Hello friends, and welcome to The Unsophisticated Investor! Brought to you by Scott & Rob, the founders of PitchedIt!

If you want to be one of the first to get access to some of the most exclusive private market investment opportunities in Europe, join our limited waitlist now.

Now, let’s get into it 👇

Silicon Valley's unicorn population is starting to thin. Frothy valuations and a hike in interest rates have left much of the herd struggling to maintain their title.

2021 was a wild time in venture capital. With interest rates near zero, due diligence processes were rushed and many new Unicorns were crowned thanks to startups raising huge amounts of money at crazy valuations. FOMO is a big player in startup investing but common sense and best practice really took a hit. And the scars left behind will be visible for a long time to come!

The result of this is we’re now seeing a group of once lauded companies struggling to survive. Many of these Unicorns are now being dubbed “Zirpicorns” - companies last valued between January 2020 and March 2022 when zero-interest rate policies (ZIRP) propped up valuations. Now these Zirpicorns are running out of money. If they raise more, it’ll likely be a ‘down-round’ i.e. raising at a lower valuation. Not a position they want to be in. Nearly 90% of the 128 companies that achieved valuations of $1 billion or more in 2021 are now estimated to be valued lower in private trades according to Forge Global. And many of these companies have already seen their valuations plummet.

In one way, it’s plain as day to see what happened, but at the same time, it’s hard to understand why. We’re talking about professional investors whose job is to source and invest in startups that have the potential to become a billion dollar company. When every investment a fund makes has to ‘return the fund’, i.e. provide a big enough return to cover the initial value of the entire fund, you’d expect due diligence to be a bit stiffer. But, judging from what we’re seeing and hearing, it sounds like due diligence got tied up in the boot while FOMO took the wheel.

This is a tricky situation for founders. I can understand the reluctance to raise fresh funding. The fear of attracting a lower valuation (which in many cases, is guaranteed) will make it more challenging for these companies to pursue an IPO or acquisition. Attaining and holding the title of unicorn can be an indicator of your worth as a startup. The term was originally used to emphasise the scarcity of such companies but now it’s become a benchmark for many investors. If a startup gains and then loses the title, it may struggle to attract investors or buyers in the future. On top of that, a significant drop in valuation or the inability to raise money will leave these companies struggling to survive and lead to cost cutting and shut-downs. This is already being seen across the ecosystem.

The result will be some great opportunities for Private Equity managers eyeing potential “bargain basement” deals. The problem is, they’re also hamstrung by current valuations. Taking a company to profitability and operational excellence is what PE firms do. But they can’t acquire a company they can't sell for a realistic price. So, while founders are still coming to grips with new valuations, PE funds are left waiting. 

Venture Capital is also left with a new reality, resulting in a stockpile of so called ‘Dry-Powder’. Funds that have been committed by investors but are sitting idle waiting to be deployed. Exits from older investments in their portfolio have slowed considerably due to the drought in initial public offerings. Investors in these VC funds aren’t investing more capital because they aren’t seeing a return on their previous investment, leaving funds struggling to raise future funding. 

Unfortunately, we’re going to see the shut-down of a lot of funds alongside many of these startups. So what does this all mean for the startup-VC relationship?

Many think it will all result in a much needed correction and the outcome will be founders who’ll prioritise building sustainable companies over all-or-nothing strategies. It will likely also mean greater scrutiny of business models and no longer waiting a decade for a startup to become profitable.

All in all, we believe it's a good thing. Startups will have to prove their valuation through business performance and will have a greater focus on building solid businesses with real staying power; not propped up by a seemingly endless flow of funding.

We’d like to think there’ll be more discipline on both sides, and if so, we can expect some incredible companies to emerge over the next decade!

What we’ve been working on at PitchedIt

Fundraising continues!

• Pitching 🎤

• Pitching 😄

• Pitching 😅

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of PitchedIt. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. PitchedIt’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
PitchedIt Co-Founders