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Why is VC funding expected to dry up?
We all read the Sequoia letter. Nobody can question their wisdom. Their advice is obviously based on decades of experience. But what are the underlying dynamics to this? The crisis isn't expected to last more than a couple years. VCs have horizons of 7-10 years. They have already raised from their LPs and need to invest over a certain period of time. It would make sense for MicroVCs and Angels to be fearful of strecthing their small bank accounts, though not the best ones I would think. So what's the logic here? Are VCs gonna take advantage of the fear for tougher terms? At least for early stage hardtech companies in development, the crises shouldn't matter. They can spend next 18 months in their labs or garages building while the world recovers, taking advantage of cheaper talent to hire if needed. Thoughts?
- rossdavidh 7y agoI think the issue is that a lot of the money spent by VC's (collectively) in the last 5 years or so, has not been especially well-spent. Not just in the normal "lots of small bets, only a few of which will pay off" kind of way. Instead, in the "lots of really big bets, most of which have no chance of paying off at this level" kind of way. The alleged "black swan" of Covid-19 is really just an excuse for what has been obvious for a while now, which is that a lot of recent VC money was 5-10x what it should have been, and as a result a lot of otherwise potentially reasonable business ideas have become value-destruction-machines. So, I think it is still clear that a savvy VC could make money by investing now...in good ideas, funded at an appropriate level. The problem is that many of them are setting on 10x the amount of money that they can do that with.
- furrukhsana 7y agoI believe that what it truly is. Both the VCs and open market investors have been expecting a depression. May be even wishing for one because the long bull run was just making everyone nervous. They were just missing a trigger. Likes of WeWork didn't do it, trade war somehow didn't do it. Surprisingly a virus did it.
- WheelsAtLarge 7y agoWe are about to go through a period where investors will question every investment a lot more. Investments that looked promising at the beginning of the year will look bad because the demand for the service or product will dry up and there won't be any possibility for an investment return. So investors will be looking to back out when and where ever possible. While the money that has been given will likely be spent any new money won't be given out as easily as before. We're also going to see a credit crunch where the lenders will make it hard for borrowers to borrow money and many lenders are going to go bankrupt because borrowers won't be able to pay back their loans. Also, the VC's will also deal with a cash crunch too. Many of them have lost a lot of money and asset value. They just don't have the money they had at the beginning of the year. It's going to suck for a while but we'll get through it the same way we have in the past.