«Venture Capital is Like Dancing on Razor Blades»

The pandemic, war in Ukraine, inflation, and the market correction. It is a difficult time to invest but it is also an opportunity for the daring, writes Michael Bornhäusser in a piece for finews.first.

This article is published on finews.first, a forum for authors specializing in economic and financial topics.

Equities are falling sharply. Just put in a stop-loss order and get a portion of the investment back. Then simply wait until the market has reached the bottom and get back in. Bingo!

That doesn’t work for private market investments. Whether through a VC or a PE fund, no exit means no capital back. There is nothing to stop losses.

Let’s take a quick look back! Everything was in order just twelve months ago, despite the pandemic. Equity markets only went up, interest rates were negative and private companies, especially ones in the online sector, saw record valuations. IPOs, divestments, sales, secondary investments, and investment rounds were constantly being planned and executed. In short, it was exit time. Companies late to the show see their IPO plans being canceled, and deals delayed. Fundraising has become exceedingly difficult – to put it mildly.

«The new magical term out there is profitability»

Some of the largest private market players say the current situation is «catastrophic». Others say «everything will be ok in about 12 months». J.P. Morgan is among the most negative voices out there right now. They do not believe the market will recover in the next 24 to 36 months. Venture capital and private equity firms must assume valuations for buyouts and takeovers will fall by up to 60 percent, one of their bankers has indicated.

The new magical term out there is «profitability». It is a metric that has placed a very marginal role in tech, particularly in e-commerce or e-services, two sectors that greatly benefited from the pandemic. Startups financed by venture capital are particularly affected as they are not even able to consider financing rounds or potential exits.

«External money is only there at massively diminished valuations compared with 12 months ago»

Venture capital is like dancing on razor blades right now. «Reduce the money burn», writes Sequoia, one of the largest venture capital funds in the U.S. Personnel costs and marketing expenses must be cut, growth targets lowered, and investments delayed. If that is not enough, and companies still need money, then they have to bridge. That means keeping the company alive until this and possibly the next crisis is past. External money is only there at massively diminished valuations compared with 12 months ago, if at all. The only advantage in the environment right now is that the entry price for investors is also much less.

The current markets, as all crises can be, are an opportunity to get in for brave funds and investors with both liquidity and a flexible investment horizon. But they will have to show great courage. according to some market players. It is hard to see anything through the mess right now. Inflation, the war in Europe, supply chain and logistics issues, and a pandemic that has by no means disappeared. All hold potentially large risks for private market investments and there is no stop-loss order out there that serves as an emergency brake.

Michael Bornhäusser is the chairman and managing partner at Bulb Capital, a Swiss venture capital firm founded in 2019. Previously, he led the private equity and products business of Swiss private bank Sallfort. In the 1990s, Bornhaeusser worked as an entrepreneur in IT. He co-founded Pixelpark, which went public in 1999. Since the start in 2019, Bulb has invested more than $180 million in 13 startups in the U.S., the U.K., and Latin America, participating in 17 rounds of financing and achieving eight successful exits.

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