68% of VC Funds Suffer Drop in Value During First Quarter

Bloomberg Línea — The boom for venture capital (VC) funds appears to be waning amid the current downturn, with growth stocks in free fall, a recent wave of layoffs by startups and unicorns, and central banks struggling to control inflation, and venture capital funds are seeing a drop in their returns on a global scale.

After two years of record investments, the impact of growing pessimism on private market portfolios is already being felt. Nearly two-thirds of quarterly venture capital returns from the second quarter of 2020 through the third quarter of 2021 came from unrealized securities on average, and we are entering a period of shrinkage second only to the pre-dotcom crash, according to an analysis by data firm Pitchbook.

With technology company compensation pools in the public markets seeing a reset in their valuations over the past year, it is highly likely that current fund net asset values will drop soon, and limited partners of funds are wondering what will happen to their huge paper returns, the report states.

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Preliminary data for the first quarter of 2022 alone indicates that 68.1% of VC funds recorded a drop in valuations from their 2021 peak, which was a multi-year high. Of those funds with downgrades, the average decline was 7.8%, the analysis states.

If the data holds after further compilation, the material drop in limited partner allocations is likely to be $1.4 trillion in unrealized VC fund value since the end of 2021.

This affects Latin America when considering that 62% of rounds comprise foreign capital, according to the Latin American Venture Capital Outlook report by Endeavor and Glisco Partners.

Further reductions are likely as the market environment has continued to deteriorate during the second quarter, and Pitchbook predicts that venture capital funds will be hit by the headwinds buffeting startup valuations the longer the liquidity crisis lasts.

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In this context, startups are tightening their belts to avoid down rounds, and it is in periods like this that last year’s outdated valuations will be put to the test, according to Zane Carmean, author of the report.

However, “fortunately, the normalization of transaction terms and valuations is likely to be healthy for the market over the long term”, Carmean writes.

“If recessionary pressures dissipate sooner than expected, a new cycle is likely on the horizon.”

According to data compiled by Pitchbook on startups globally, rounds they are raising now are below their previous valuations, and which reached a new low in May of this year.

Translated from the Spanish by Adam Critchley