Technology stock plunge worrying venture capital leaders from Silicon Valley to Australia

“This is hard,” Dibner said. “But it hasn’t felt hard for a long time.”

This wave of worry has now reached Australia, where venture capital funds have been on a historic spending spree. They pumped a record $3.6 billion into Australian start-ups in the March quarter of 2022, according to Cut Through Venture. Last year’s investment tally of $10.1 billion was more than three times pre-COVID investment levels.

But the threat of surging interest rates means those heady times are over. Senior sources in the Australian VC community say they have begun telling their start-ups to prepare for a very different environment, where fresh capital is suddenly much harder to find and growth for growth’s sake won’t be indulged.

Difficult conversations about start-up valuations are also being held with the superannuation funds, family offices and wealthy investors who put increasing amounts of capital into Australia’s VC sector in recent years.

The pain among tech investors in public equity markets is easy to see. The fall and fall of Cathie Wood’s ARK Investments ETF – down 63 per cent since November, versus a 22 per cent fall on the Nasdaq Composite index – has been watched obsessively.

Another tech investor being closely monitored is Chase Coleman, who runs Tiger Global Management. According to reports, its main hedge fund fell 15 per cent in April and is down 44 per cent this year. The firm’s long-only fund tumbled 25 per cent last month and is down 52 per cent year-to-date.

But where ARK’s investment performance is mainly just fodder for memes and snark, Tiger’s horror year carries much more importance for the global venture capital sector.

Tiger’s changing stripes

Tiger is part of a relatively new breed of investor called a crossover fund, so called because it backs both public companies and private firms.

Indeed, Tiger’s venture business, run by Chase Coleman’s business partner, Scott Shleifer, dwarfs the public side of the business; where Tiger’s public market funds have $US19 billion ($26.8 billion) in assets (down from $US35 billion at the end of 2021), its venture funds had $US65 billion under management at the turn of the calendar year.

Although the entire global venture capital sector experienced a surge of activity in calendar 2021, Tiger stood out as something special.

According to CB Insights, it was the world’s most active venture investor last year, raising $US18 billion for its two most recent funds and investing in a staggering 333 companies across the year.

As 2021 wound down, Tiger heated up. It invested in 111 companies in the December quarter at a rate of more than one a day. And according to Crunchbase, Tiger’s pace actually stepped up in the March quarter of 2022 to 133 deals, up 140 per cent on the same quarter in 2021.

Australia has always been a happy hunting ground for Tiger – it was an early investor in both Atlassian and Afterpay – and has featured in the firm’s recent investment spree. It took a stake in buy now, pay later group Scalapay late last year and in January led a $75 million fundraising round for grocery delivery start-up Milkrun. Other investments include Mr Yumm, Go1 and Shippit.

Tiger’s spree raises questions about how any investor can make so many decisions in such a short space of time and maintain high due diligence standards. But right now, the biggest question is what might have happened to the valuation of Tiger’s private start-up portfolio.

Data released last week by CB Insights shows valuations held up in the March quarter, as investors committed $US144 billion to startups globally; early- and mid-stage start-up valuations rose 21 per cent and 15 per cent respectively, with late-stage valuations down just 4 per cent.

But things have deteriorated since then.

As Bezos, Gurley and other VC veterans warned last week of dark clouds ahead, financial markets data firm Refinitiv released its venture capital index, which tracks a mix of individual VC portfolios and listed stocks to come up with a proxy for the venture sector. It fell an ugly 24.2 per cent in April, taking year-to-date losses to 45.8 per cent.

Whether anything close to that fall is reflected in the portfolios of VC firms – including those in Australia – is a major point of contention.

Extended recovery

The policy of most big Australian VCs is to only revalue a portfolio company when there is a funding round by a credible third party. Valuations are not pumped up when public tech stocks are running hot – as they were in the middle of calendar 2021 – and they are not wound back when public markets are plummeting.

The consensus is that the tech wreck on equity markets – where almost half of companies on the Nasdaq have fallen 50 per cent or more from their 52-week highs – could take between 12 and 18 months to flow through to start-up valuations.

But the role played by crossover funds means VC valuations don’t need to fall for the plunge in tech stocks to have an impact.

Most believe the crossover firms such as Tiger simply won’t be able to pump money into private start-ups like they have in the past two years. The reduction in funding from crossover firms will probably be most acute for later start-ups who have also seen IPO markets around the world turn much less friendly since the start of 2022.

With this in mind, local VCs are telling start-ups who thought they could raise capital in the next 12 to 18 months they probably need to make the money last for as much as two years.

One senior Australian VC investor says even though the tone of board meetings at investee companies is obviously radically different from the second half of 2021, when start-up valuations were frothy, there has also been a distinct change in tone from the March quarter to the June quarter.

Inviting feedback

The basic message now is that start-ups need to pull in their horns – be a little less aggressive about growth and a little more focused on conserving cash and proving the sustainability of unit economics (read: profitability).

And although private start-up valuations might not be falling yet, there is recognition that a VC firm who ignores what’s going on around them is hardly likely to engender much confidence from investors, who are called limited partners or LPs.

So, conversations are occurring. For example, one of the country’s biggest VC firms wrote to its investors last week to invite feedback on an approach that will see it try to be as transparent as possible as to how individual portfolio companies are performing. Expect these discussions to continue in the coming months.

To be clear, there is no panic among local VC investors – Australia’s VC system is mature, robust and still delivering great numbers over longer periods, in no small part thanks to the success of Canva.

Whether the collapse of local on-demand grocery players Send and Quicko last week is a sign of what’s to come remains to be seen. But there is a sense that the tide is going out and some in the sector will be left exposed. For the first time in at least a decade, venture capital is about to be reminded that investing is hard.