According to WSJ, VC firms raised $20.6 billion in new funds in Q4 2022, a 65% drop YoY and the lowest Q4 since 2013. Anecdotally, I know many fund managers have a much harder time raising new funds since H2 2022. I believe this happens not only to venture capital but also to risk assets in general. The risk free return is now approaching 5%. People can buy a 12-month treasury bill and earn 5%, which makes illiquid and volatile investments like VC less appealing. In addition, venture and growth investments were overfunded and overvalued from Q4 2020 to Q1 2022. Most of the investments are now deep under water. Even high quality companies like Stripe and Instacart had to make deep cuts on their valuations. Investors got burned pretty badly and are now pulling back sharply.
I believe we are going through a period of de-leveraging and de-risking as the cost of capital becomes substantial. Zero-interest rate really distorted the asset values and inevitably we will see a big reset on the valuations across the board. High growth stocks were hit first. But we are now seeing valuations for VC/PE and real estate deflating. I suspect we will see more carnage down the road and investors ought to be cautious at times like this. After all, 5% risk-free return is pretty good. Any extra risk needs to be rewarded with sufficient expected returns.