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Is Silicon Valley Bank’s downfall one of the first dominoes to fall, signaling the end of venture capital’s cheap money? Or with the recovery of the stock market, will the era of wine, flowers, low interest rates, and SPACs return?
Because some values have dropped by 50% or more, it is stated that ventures are hanging onto the money they previously raised and are hesitant to raise more. They also hope that the heydays and high values of the recent past will reappear.
Here is one of the main causes of the high values: In the past 12 years, VC financing has increased 12x. Due to the 14 years of historically low interest rates, many investors have shifted their money from debt and bonds to equity and venture capital in quest of higher returns.
From $28 billion in 2009 to about $345 billion in 2021, VC financing grew. Many people believe that the present squeeze on venture capital is just temporary. VC has had numerous highs and lows.
Is the decline really momentary? Is this rise in interest rates and associated decrease in the amount of available venture capital transitory, like prior tough periods in VC, or is this period distinct? There are three strong arguments for why the current tightening of VC may not be transitory, why interest rates may not fall even if they do not rise further, and how it may affect the future of the sector.
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Innovation in Finance
A Changing Economic Environment: From $12 trillion in 2009 to $31 trillion in 2022, the government deficit has grown significantly. This indicates that eventually the federal government will reach a point where taking on more debt will become too expensive and restrictive. And there are already concerns about a rate rise.
Constraints on Monetary Policy: In the past, loosening the money supply has been a well-liked method to boost growth during economic downturns. However, the current circumstances pose fresh difficulties.
Expanded inflation might have a negative impact on the economy if the money supply is expanded. This restriction lends more credence to the idea that the cheap money period may be giving way to a new norm characterized by more stringent financing requirements. Additionally, the expenses are piling up.
Global Economic Dynamics: The establishment of a group led by China with the goal of dethroning the U.S. dollar’s hegemony with a currency backed by gold poses possible disturbances to the American economy.
If successful, this program will significantly alter the dynamics of the world’s financial system, changing the way capital flows and affecting venture funding, making it harder to get quick cash, and encouraging a move toward money-smart strategies.
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Source: forbes
