Venture Capital -- Unicorn Blood On The Street

Earlier this year, signs abounded that smart money was still piling into venture capital.   According to the PitchBook-NVCA Venture Monitor,  U.S. venture capitalists are expected to pour over $100 billion into startups for a second straight year, following the previous record invested in 2018. Hedge funds leaders including Coatue and others have announced special vehicles for venture/growth equity.

Yet figures just out from Preqin for Q3 2019 show venture capital deal volume continuing to slow in the third quarter.  Interestingly, private equity is slightly up.

Venture capital deal activity has declined in every quarter since breaking records in Q2 2018.  For example, in Q3 2019, 3,269 deals worth a combined $52 billion were made, compared to Q3 2018 when 4,288 deals were made for an aggregate $70 billion, according to Preqin.

Furthermore, Q3 2019 had 247 exits, the fewest number in the past five years. The total value of exits for Q3 2019 was $26 billion, down from $73 billion for Q2 2018.

The public stock markets have often been the place of choice for both private equity and venture capital investors to cash out.  But there is currently a shift in equity investing to more defensive postures.

Nay-sayers highlight increased vigilance about any form of new equity being put into the stock markets.  People are questioning unicorns (start-ups with private market valuations exceeding $1 billion)—should every company be labeled as technology in an effort to receive a valued Silicon Valley valuation, and should complicated corporate ownership and share class structures be so tolerated?  There is even talk of unicorn blood on the street with the cancellation of the initial public offering for WeWork’s parent, We Co.

Morgan Stanley Chief Investment Officer Michael Wilson goes further in saying, “In our view, the days of generous capital for unprofitable businesses is over.”

I am an investor and business builder. In my work with McKinsey, I originated and optimized global strategic businesses in asset management and private equity. I have s...