The tech slump is encouraging venture capital to rediscover old ways

Until last year, venture capital (vc) had been riding high. With interest rates close to zero and little yield to be found elsewhere, large companies, hedge funds and sovereign-wealth investors began ploughing cash into startups, sending valuations upwards. In 2021 alone the amount of money flowing to startups doubled to nearly $640bn. Then soaring inflation and surging interest rates brought the market crashing down. Last year the investments made in startups worldwide sank by a third. Between the final quarter of 2021 and the same period in 2022, the valuations of private startups tumbled by 56%.

The downturn inevitably draws comparisons to the dotcom crash of 2000-01, when deep winter set in and vc investments froze. Luckily for both founders and their backers, conditions are not so frosty today. Startups’ balance-sheets are stronger than they were 20 years ago; valuations are not quite so detached from revenues. In America alone, venture capitalists have about $300bn in dry powder. Nonetheless, the industry that is emerging from the tech slump and into an era of dearer money looks different from the one that went into it. In many respects, vc is returning to the ways of decades past.

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