SVB Financial Group's collapse added another concern to venture capital funding after the sector was already under pressure. The once high-flying asset class' roadblocks include higher interest rates, weaker public equity markets and valuations under pressure. But the shakeout might result in venture capital funds receiving more favorable investing terms from portfolio companies, which could lead to higher returns down the road.
Sluggish IPO market: As equity markets retreated last year, the Renaissance IPO index lost 57.1%, the worst performance since the index’s formation in 2009. While it has rebounded to a 13.4% gain this year, the new issue market remains challenging.
Lower valuations: VC-backed IPOs had a 3.7 times sales multiple at the end of 2022, the lowest valuation since the second quarter of 2016. Multiples for these offering have been falling since the end of 2020.
VC-backed IPO valuations and number
Fundraising lags: Last year, VC funds raised $169.4 billion. Through the first two months of 2023 there have been 57 fund closings, raising $5.7 billion. VC funds' net internal rate of return was -15% through the first nine months of 2022, according to Cambridge Associates. Over 10 years, it was an annualized 19.2%.
VC fund closings**
Friendly environment: Terms are getting friendlier for VC funds. At the end of February, late-stage and growth-stage firms have VC Dealmaking Indicator scores of 67.92 and 75.15, respectively, based on PitchBook Data's methodology. Scores above 50 indicate an investor-friendly environment.
*2023 data are as of March 29. **2023 data are as of Feb. 28. Sources: Renaissance Capital LLC, Bloomberg LP, PitchBook Data Inc., Pensions & Investments