“Venture capital is like dancing on razor blades”


The pandemic, the war in Ukraine, inflation and the market correction. It’s a tough time to invest but it’s also an opportunity for the bold, writes Michael Bornhäusser in an article for finenews.first.

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

Stocks fall sharply. It is enough to place a stop-loss order and recover part of the investment. Then just wait for the market to bottom out and come back. Bingo!

This does not work for private market investments. Whether through a venture capital fund or a private equity fund, no exit means no return of capital. There is nothing to stop the losses.

Let’s go back a bit! Everything was in order barely twelve months ago, despite the pandemic. Stock markets only rose, interest rates were negative and private companies, especially those in the online sector, saw record valuations. IPOs, divestments, sales, secondary investments, and investment rounds were constantly planned and executed. Anyway, it was time to go out. Companies late to the show have their IPO plans canceled and transactions delayed. Fundraising has become extremely difficult – to put it mildly.

“The new magic word is profitability”

Some of the biggest private players in the market say the current situation is “catastrophic”. Others say “everything will be fine in about 12 months”. JP Morgan is one of the most negative voices of the moment. They don’t believe the market will recover in the next 24 to 36 months. Venture capital and private equity firms must assume that takeover and buyout valuations will drop by as much as 60%, one of their bankers said.

The new magic word is “profitability”. It is a metric that has granted a very marginal role to technology, especially in e-commerce or e-services, two sectors that have benefited greatly from the pandemic. Venture capital-backed startups are particularly hard hit as they are unable to even consider seed rounds or potential exits.

“Outside money is only here at massively diminished valuations from 12 months ago”

Venture capital is like dancing on razor blades right now. “Reduce cash consumption,” writes Sequoia, one of the largest venture capital funds in the United States. Personnel and marketing costs must be reduced, growth targets lowered and investments delayed. If that’s not enough and businesses still need the cash, they need to bridge the gap. It means keeping the business alive until this crisis and possibly the next has passed. External money is only there at massively diminished valuations from 12 months ago, if at all. The only advantage in the current environment is that the entry price for investors is also much lower.

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

Michel Bornhäusser is Chairman and Managing Partner of Bulb Capital, a Swiss venture capital firm founded in 2019. Previously, he led the private equity and product activities of Swiss private bank Sallfort. In the 1990s, Bornhaeusser worked as an IT entrepreneur. He co-founded Pixelpark, which went public in 1999. Since inception in 2019, Bulb has invested over $180 million in 13 startups in the US, UK and Latin America, participating in 17 funding rounds and completing eight successful outings.

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