Clear evidence of just how tough venture capital land is getting emerged this month with setbacks for two high-profile industry firms.

After nearly a year of marketing new, multibillion-dollar funds, both Insight Partners and Tiger Global have failed to reach near anywhere near their targets. After an already dismal year, it was a particularly painful augury for venture capital and start-ups.

As one Silicon Valley veteran put it: “It was the first real sign that existing investors are saying ‘no más’.”

Insight, considered one of the highest-rated venture capital managers, has delivered an average net internal rate of return of 22 per cent over time, according to one person familiar with the matter. But investors have committed just $2bn of a planned $20bn fund. That is a sharp fall from the $20bn that Insight raised in 2022.

It is a similar situation at Tiger which was forced to write down its venture investments by a third after pumping billions of dollars into tech start-ups at the peak of a funding boom in 2020 and 2021. Investors have committed around $2bn of its planned $6bn new fund and its target was just over half the size of the last fund it raised.

One large institutional investor in Insight Partners says they have concerns about allocating more cash to illiquid private funds as valuations have crashed and interest rates have risen. “We’ve been trying to avoid speaking to them as we’re not sure if we’re coming back in,” the executive admits.

The knock for start-ups and companies reliant on VC money from the current industry funding shortfalls will be painful. The vast sums of cash invested into start-ups during a pandemic-era bubble in tech valuations are still keeping many entrepreneurs afloat.

But amid a difficult market for initial public offerings and with debt capital becoming more expensive, even the best of those start-ups will soon come cap in hand to equity investors asking for more money. There will be a bloodbath of “down rounds” — where valuations fall in a fundraising — and insolvencies.

Some notable down rounds have hit already — at payments giant Stripe; Swedish financing firm Klarna, and security firm Snyk, for example. But many founders are still trying to eke out cash reserves.

The clock is ticking down. SoftBank-backed robot pizza-maker Zume shut down this month despite raising nearly $500mn in venture capital. And Tiger Global is taking bids on a chunk of its portfolio companies. The companies that are able to raise money, even at a big discount to their last funding round, will be the lucky ones.

Many in the industry expect the cliff edge moment to come in the second half of this year — the point at which companies that raised funds at the end of the boom in late 2021 and early 2022 have experienced 18 months of cash burn. For many companies, the cash burn periods are far longer.

“Valuations are coming down a lot, time has taken its toll on those companies that need to raise,” says a senior private investor in a large growth fund. “But we’re nowhere near the bottom of the cycle.”

One start-up that last year raised at a valuation of $1.5bn was now shopping its shares at a valuation of just $500mn, the investor says. “It’s either that or bankruptcy,” they add.

More signals of the pain to come are evident in the secondary market — where shareholders trade stock privately. According to data provider Carta, the value of preferred equity (usually shares held by management and venture investors) in start-ups valued at more than $500mn has plunged by a quarter since the first quarter of 2022. The value of common equity (typically shares held by employees) in such start-ups is down an average 36 per cent.

A discrepancy in price between what a seller of shares wants and how much an investor is willing to pay has dramatically narrowed — the “bid-ask spread” has gone from 44 per cent to 17 per cent, according to Carta — suggesting that sellers are far more willing to accept heavy discounts than a year ago.

The one bright spot amid the gloom is artificial intelligence, a sector where the hype is so extreme that it could attract new cash and lift many boats.

Venture capitalists’ craft lies in their ability to tell compelling stories about what the future will look like. For now, they can’t sell the story of the last fundraising round. “People who are new to the business think this is temporary,” said a partner at one Silicon Valley fund. “It will dawn on them that the world has changed.”

tabby.kinder@ft.com

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• Source: https://www.ft.com/content/b8a4214f-7f64-4d3a-97c4-4731f2effb0d