Summarize this content to 2000 words in 6 paragraphs in Arabic Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Two years ago, US venture capital giant Sequoia issued a stark warning to tech start-ups. Recovery from the market downturn would be slow. The kind of assistance that supported the economy in the pandemic would not be repeated and cheap funding was no longer an option. The bleak prognosis was correct. The US start-up sector is still wading through the most significant drawback in funding since the dotcom crash. The pile of unallocated capital, aka dry powder, is vast. Data from Silicon Valley Bank puts the total at $277bn, while the National Venture Capital Association says it is closer to $312bn. Either way, it is a record high and more than double the sum available in the dotcom bubble — adjusted for inflation. Caution about allocating funds means the ratio of dry powder to investment is lower. The low interest rates that drove nearly $27bn into crypto start-ups in 2022 and turned robot pizza start-up Zume into a $2bn company are gone. In the first quarter of 2024, US VC funding deals fell to the lowest point since 2017, according to PitchBook. With a diminishing prospect of rate cuts this year, this is likely to continue. In public markets, valuations for the largest tech companies have already rebounded. High multiples on which they trade have pushed the broader S&P 500 Shiller price-to-earnings ratio, aka the cyclically adjusted p/e ratio (CAPE), up from less than 30 times in late 2022 to 34 times. Yet the start-up downturn continues. Startups blame an inhospitable IPO market and regulators constraining M&A. Without exits, it becomes more difficult to persuade investors to part with their money. It is taking longer for VCs to close new funds. Over a third closed below their target last year, according to Silicon Valley Bank data.New VC firms are having the toughest time. By the end of last year the US had 3,417 VC firms, says the NVCA. That’s up from about 1,000 in 2008. A squeeze on funding could lead to a reduction. There is a good reason for investors to be wary about allocating their money. The start-up sector needs to take responsibility for never fully pricing in the downturn that hit public markets. There have been bankruptcies, including Zume, but many start-ups conserved cash and opted not to raise funds at lower valuations. When share prices fell, their valuations remained ostensibly the same. Without a reality check, VC powder will remain dry. [email protected]
