Accelerated uncertainty, both geopolitical and macroeconomic, continued to characterise and dampen the transactional mood throughout much of 2023, not least for the Venture Capital (VC) industry. What once seemed like a slight revival for the IPO market, with the public listings of ARM, Instacart, and Klaviyo prompting a surge in optimism in September, instead fuelled further scepticism among investors, with startups increasingly reluctant to go public and deliver long-awaited returns. At the year’s end, Instacart and Klaviyo were down 22.17 and 16.80 per cent, respectively, since going public. However, with ARM up 24 per cent, it shows the ambiguity of the market, mainly driven by the GenAI boom.
It sparks the question whether companies like Northvolt, a Swedish-based innovative battery manufacturer, reportedly set for a 2024 listing, will postpone its plans and how VC firms respond amid mounting pressure and expectations from investors.
This uncertainty has resulted in a growing appetite for alternative investments.
To satisfy the demands of Limited Partners (LPs), tech VCs have drawn inspiration from Private Equity (PE). For instance, in May 2023, Insight Partners raised USD 1.3bn for its continuation fund, to extend the investment horizon for General Partners (GPs) and provide near-term liquidity options to LPs.
However, secondary transactions can be unfavourable for LPs, having to decide whether to exit at a likely discount or renew its long-term commitment. Secondary portfolio pricing has been low at 69% of NAV amidst buyer apprehension, according to Jefferies. The negative sentiment is rooted in an underlying fear of excess valuations, sparked by the high volume of venture investments in the low interest-rate environment of 2021. For VCs, investors exiting at a discount ensure that resolute LPs remain whilst holding on to unmatured portfolio companies.
Another striking theme throughout 2023 was high interest rates. With startups facing financial pressures and being at the brink of collapse, investors have had a tendency of leveraging this opportunity to acquire majority stakes in undervalued assets. By doing so, investment groups are let operational control to reinvigorate the businesses.
For example, San Francisco-based Industry Ventures has earmarked USD 260mn in committed capital to its second buyout fund focused on smaller SaaS providers. Interestingly, Lindsay Sharman, Head of the Tech Buyout team at Industry Ventures, recently said that the current lack of liquidity in the venture ecosystem is “generating notable buyout demand”.
Illiquidity has been a significant problem for investors with dry powder reaching a staggering USD 580bn for VC firms globally, compared to USD 1.3tn for PE, according to James Ephrati at Lightspeed Venture Partners. While pressure to deliver returns is increasingly piling on funds, not all investors share a pessimistic outlook for 2024.
Pär-Jörgen Pärson, Partner at Northzone, instead envisions a more positive trajectory as it is widely known that VC markets have “always been cyclical”. Listings in Q3 2023, he commented, were comparable to a false-start with activity likely to pick up in the near future.
A closed IPO market, inflation, continuous high interest rates, and a sharp decline in valuations have been hallmarks for 2023. As a result, VC firms have adopted PE strategies to ensure liquidity for their investors. Whether that is through secondaries or buyout vehicles, the resemblance is evident.
With Klarna, having seen its valuation plummet from USD 46bn to USD 7bn in 2022, gearing up for a potential near-time IPO, startups may need to follow suit by lowering their valuations for greater financial access and improved odds of a successful listing.
Price corrections may be one solution for the VC industry – however the larger question remains: are alternative investments here to stay?
written by Clarence Claus
References:
Jefferies (2023). H1 2023 Global Secondary Market Review. [online] Available at: https://www.jefferies.com/wpcontent/uploads/files/IBBlast/Jefferies_Global_Secondary_Market_Review_July_2023_.pdf (https://www.jefferies.com/wp-content/uploads/files/IBBlast/Jefferies_Global_Secondary_Market_Review_July_2023_.pdf).
Kinder, T., Hammond, G. and Louch, W. (2023). Tech funds adopt private equity strategies in race to return cash to investors. [online] www.ft.com. Available at: https://www.ft.com/content/6e70fed4-eecf-46f1-83cb-9d20da9c1d7f.Levingston, I. and
Milne, R. (2023). Northvolt plans Stockholm listing for potential $20bn IPO. [online] www.ft.com. Available at: https://www.ft.com/content/ca7a87b7-8f37-411e-851e-cb83750dba0f (https://www.ft.com/content/ca7a87b7-8f37-411e-851e-cb83750dba0f).
Morris, C. (2023). Venture capital’s 2023 bloodbath, by the numbers. [online] Fast Company. Available at: https://www.fastcompany.com/90984752/venture-capital-vc-funding-2023-bloodbath-by-the-numbers (https://www.fastcompany.com/90984752/venture-capital-vc-funding-2023-bloodbath-by-the-numbers).
Ruff, D et al. (2023). Continuation Funds: A Continuing Trend. [online] www.orrick.com. Available at: https://www.orrick.com/en/Insights/2023/09/Continuation-Funds--A-Continuing-Trend (https://www.orrick.com/en/Insights/2023/09/Continuation-Funds--A-Continuing-Trend)
Teare, G. (2022). Forecast: VCs Stockpiled Record Funds This Year. Where Will All That ‘Dry Powder’ Go In 2023? [online] Crunchbase News. Available at: